mr  wwniu 

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GIFT 
MAR  26    1918 


FEDERAL  OPERATION  OF  TRANSPOR- 
TATION SYSTEMS 


EXTRACTS  FROM  HEARINGS 


BEFORE  THE 


COMMITTEE  ON  INTERSTATE  AND  FOREIGN  COMMERCE 
OF  THE  HOUSE  OF  REPRESENTATIVES 


SIXTY-FIFTH  CONGRESS 

SECOND  SESSION 
ON 

H.  R.  8172 


■OT  rim 

'<  XT  T  \7    .^    »    ;*.  T  T  " 


STATEMENT  OF 


HON.  ALBERT  M.  TODD 

PRESIDENT  OF  THE  PUBLIC  OWNERSHIP  LEAGUE 
OF  AMERICA 


JANUARY  29.  1918 


Cl 


i 


JjV^     '  FOR  ADDITIONAL  COpIIBS  ADDRESS 

Public  Ownership  League 
"^'       of  America 

Westory  Building,  Washington,  D.  C. 


WASHINGTON 

GOVERNMENT  PRINTING   OFFICH 

1918 


COMMITTEE  ON   INTERSTATE  AND  FOREIGN  COMMERCE, 


House  of  Repbesentatives. 


THETUS  W.   SIMS,  Tennessee,   Chairman. 


FRANK  B.  DOREMUS,  Michigan. 
DAN  V.  STEPHENS,  Nebraslsa. 
ALBEN  W.  BARKLEY,  Kentuclcy. 
SAM  RAYBURN,  Texas. 
ANDREW  J.  MONTAGUE,  Virginia. 
PERL  D.  DECKER,  Missouri. 
CHARLES  P.  COADY,  Maryland. 
ARTHUR  G.  DEWALT,  Pennsylvania. 
HARRY  H.  DALE,  New  York. 
JOHN  S.  SNOOK,  Ohio. 
JARED  Y.  SANDERS,  Louisiana. 

W.  Alta  Tatlob,  OJerh. 
n 


JOHN  J.  ESCH,  Wisconsin. 
EDWARD  L.  HAMILTON,  Michigan. 
RICHARD  WAYNE  PARKER,  New  Jersey. 
SAMUEL  E.  WINSLOW,  Massachusetts. 
JAMES  S.  PARKER,  New  York. 
CHARLES  H.  DILLON,  South  Dakota. 
BURTON  E.  SWEET,  Iowa. 
WALTER  R.  STINESS,  Rhode  Island. 
JOHN  G.  COOPER,  Ohio. 


'^ 


Public  OwBsrsliip  leape  of  America 

Albert  M-  To<id,  Pres-oent, 

Westory  Building.  l--^14ihSte 

Washington     ^     '- 


STATEMENT  OF  HON.  ALBERT  M.  TODD,  PRESIDENT  OF  THE 
PUBLIC  OWNERSHIP  LEAGUE  OF  AMERICA. 

January  29,  1918. 

Gentlemen,  in  appearing  before  you  to  represent,  so  far  as  I  may, 
the  interests  not  only  of  the  Public  Ownership  League  of  America 
but  the  citizenship  at  large  of  our  country  from  whose  industry  t^ 
means  have  been  provided  for  building  and  maintaining  all  of  (mr 
transportation  and  other  public  utilities,  I  desire  first  to  thank  you 
for  the  privilege  you  have  so  kindly  accorded. 

At  no  time  in  the  history  of  our  Nation  or  the  world  has  legislation 
been  enacted  of  such  colossal  economic  interest  as  that  now  before 


915 


371589 


916  FteDEkvL   OPKflATION    OF    TRANSPORTATION    SYSTEMS. 

Cotigress^,'  ^^Mcli  .will  so  vitally  affect  the  political  institutions  of  our 
country  and  the  happiness  and  welfare  of  its  people. 

In  placing  my  views  before  you  I  shall,  on  account  of  the  limitations 
of  time,  not  enter  in  an  academic  argument,  but  ponfine  my  remarks 
/^largely  to  the  financial  aspects  of  the  question. (I  will  only  briefly 
state  that  pubUc  ownership  as  well  as  operation  of  all  those  utiHties 
and  natural  resources  which  by  their  nature  are  essentially  monop- 
olies, is  one  of  the  most  natural  functions  of  Government,  and  is 
fundamental  to  justice,  equality  of  opportunity,  and  democracy^  ^ 
"This  has  been  my  belief  for  more  than  30  years,  and  has  been  con- 
stantly confirmed  by  study  and  observation  in  many  foreign  coun- 
tries as  well  as  in  our  own.  In  reference  to  this,  I  will  briefly  state 
my  experience  in  the  genuinely  democratic  Republic  of  Switzerland. 

Traveling  through  Switzerland,  one  is  immediately  impressed  with 
the  industry,  dignity,  and  liberty-loving  spirit  of  the  people,  evi- 
denced by  their  every  act  and  word.  The  locomotive  engineer,  the 
conductor,  the  fireman,  the  brakeman,  and  the  men  who  construct 
and  maintain  the  tracks  know  they  are  not  mercenary  employees, 
but  are  part  owners  of  the  railways  and  all  the  public  works,  and  as 
such  take  a  just  pride  and  interest  in  their  duiies  and  labors.  Under 
this  system,  strikes  or  lockouts  are  unknown  and  impossible,  for  each 
employee  realizes  that  in  rendering  his  best  service  he  is  rendering  a 
service  to  the  State  and,  as  a  citizen  of  the  State,  to  himself.  It  will 
thus  be  readily  seen  how  with  every  employee  giving  his  best  possible 
endeavor  and  each  setting  an  example  to  those  operating  the  other 
utilities  (in  all  of  which  each  ''citizen-employee''  has  a  personal 
interest),  the  State  secures  much  higher  efficiency  and  service,  with 
proportionate  decrease  in  cost  to  the  public.  As  the  fictitious 
salaries  paid  in  this  country  to  presidents  of  the  public-service  com- 
panies, whose  chief  interest  is  to  absorb  the  earnings  of  the  road  are 
unknown,  and  all  officers  and  employees  are  coworkers  under  civil- 
service  rules — ''soldiers  for  the  common  good" — private  graft  and 
plunder  is  impossible  and  unknown. 

Illustrating  the  results  under  this  system,  I  purchased  this  ticket 
which  T  show  you,  good  for  42  days  continuous  or  intermittent  rides 
at  the  pleasure  of  the  holder,  over  any  and  all  of  the  railways  and 
steamboats,  for  the  equivalent  of  $27,  or  about  67  cents  a  day. 
Tickets  are  also  issued  for  1,  3,  6,  and  12  months  at  much  lower  rates; 
and  yet,  though  these  roads,  in  many  places  tunneled  through  the 
mountains  or  skirting  precipitous  cliffs,  cost  a  miUion  dollars  per  mile 
to  construct,  the  results  are  so  highly  satisfactory  that  the  Kepublic 
is  constantly  building  extensions  as  rapidly  as  possible. 

Results  in  efficiency  and  economy  equally  marvelous  as  compared 

with  our  corporate-owned  systems  prevail  in  the  telegraph,  telephone, 

express,  and  street  railways;  and  one  wonders  how  the  American 

people,  can  be  induced  in  the  face  of  the  reckless  speculating  and 

plundering  of  our  public  utilities   by  so-called   ''high  financiers," 

t£  permit  the  functions  of  their  life  to  be  thus  controlled  and  abused. 

W  seems  incredible  that  intelligent  men  engaged  in  manufacturing 

and  other  legitimate  business  should  not  join  the  farmers  and  wage 

reamers  in  the  demand  for  public  ownership.     Under  the  present 

I  corporate  system  the  rule  of  the  railways  is  to  charge  "all  the  com- 

I  modity  will  bear,"  thus  limiting  both  the  profits  of  the  producers 


FEDEHAL  OPERATION   OF  TRANSPOKTATION   SYSTEMS.  917 

and  the  power  of  the  consumers  to  buy;  the  transportation  com- 
panies thus  levying  the  largest  tax  possible  without  entirely  kiUing  the 
industry. 

I  will  now  turn  to  the  practical  questions  involved  in  the  bill  under 
consideration. 

The  President  of  the  United  States,  by  proclamation  issued  pur- 
suant to  the  authority  vested  in  him  by  Congress,  has  recently  taken 
over  the  railroads  of  the  country  for  operation  by  the  Federal  Gov- 
ernment during  the  continuance  of  the  war,  in  which  wise  and 
patriotic  act  he  has  had  the  support  and  approval  of  the  entire 
Nation;  and  as  Congress  is  now  legislating  respecting  the  compen- 
sation to  be  paid  the  railroads,  and  the  various  conditions  mider 
which  these  systems  are  to  be  operated,  it  is  highly  important  that 
in  the  solution  of  this  question  the  wisest  possible  action  by  Congress 
be  secured. 

We  who  believe  that  the  public  ownership  and  operation  of  dll 
public  utilities  which  by  their  nature  are  necessary  to  the  welfare 
and  happiness  of  the  people  are  natural  governmental  functions, 
also  believe  that  the  rightful  solution  of  the  question  is  not  based 
merely  upon  the  operation  of  these  utilities  during  the  period  of  the 
war.  We  look  forward  to  the  time — which  we  hope  is  in  the  very 
near  future — when  through  the  patriotism  of  our  citizens  and  the 
heroism  of  our  soldiers,  victory  shall  come  to  our  arms,  bringing  a 
peace  that  shall  be  wise  and  just  to  all  mankind  as  the  frait  of  the 
great  sacrifices  America  and  her  allies  are  making  in  this  world 
struggle.  Among  the  fruits  of  such  peace  those  of  us  who  believe 
in  equality  of  opportunity,  civil  liberty,  and  democracy,  hope  that 
public  ownership  and  operation  of  public  utilities  and  natural 
resources  will  be  among  our  greatest  achievements. 

These  several  circumstances  unite  to  make  the  present  year 
momentous  with  respect  to  the  development  and  solution  of  trans- 
portation problems.  Nothing  like  the  present  situation  has  been 
seen  before  in  the  history  of  the  world.  No  governmental  under- 
taking outside  of  the  great  war  itself  approaches  in  magnitude  either 
the  valuation  or  the  operation  of  the  approximately  250,000  miles 
of  railroads  in  the  United  States.  The  welfare  of  the  country  is  so 
obviously  bound  up  with  the  efficiency  of  its  transportation  system 
and  the  prosperity  of  the  coimtry  is  so  largely  dependent  upon  the 
reasonableness  of  transportation  charges  that  it  is  needless  to  dwell 
upon  these  general  aspects  of  the  problem.  But  very  few  people 
outside  of  the  railroad  men  themselves  appear  to  realize  the  tre- 
mendous importance  of  the  issues  now  being  determined  by  the 
President,  Congress,  and  the  Interstate  Commerce  Commission  with 
respect  to  the  valuation  of  railroads;  the  fixing  of  the  compensation 
to  be  paid  them  during  the  period  of  governmental  operation  and 
private  ownership;  and  with  respect  to  the  determination  of  the 
just  and  fair  price  to  be  paid  by  the  Government  when  it  shall  pro- 
ceed to  Government  ownership  as  well  as  operation. 

The  Public  Ownership  League  of  America  has  been  organized  for 
the  purpose  of  furthering  the  policy  of  Government  ownership  and 
operation  of  public  utihties,  including  transportation  systems.  It 
is  not  blind,  however,  to  the  dangers  arising  out  of  the  stress  and 
strain  of  these  terrible  times.     It  realizes  that  the  mere  form  of 


918  FEDERAL   OPERATION    OF    TRANSPORTATION    SYSTEMS. 

Government  ownership  or  operation  will  not  in  itself  guarantee  to 
the  people  of  this  country  tne  benefits  which  they  are  entitled  to 
receive  from  the  full  recognition  and  performance  of  the  transporta- 
tion service  as  a  public  function.  The  success  of  governmental 
operation  of  the  railroads  after  the  war  is  over  will  depend  in  large 
measure  upon  the  financial  obligations  which  the  Government 
assumes  in  connection  with  their  acquisition.  Many  of  the  great 
railroad  systems  of  the  country  have  been  exploited  and  robbed  by 
their  managers  over  long  periods  of  years  in  ways  that  have  created 
national  scandals  unparalleled  in  the  world's  history.  In  this  man- 
ner many  of  the  roads  have  at  different  times  been  brought  to  bank- 
ruptcy or  to  a  financial  condition  verging  upon  it  by  the  studied 
acts  of  their  officials,  who,  having  been  intrusted  with  the  manage- 
ment, have  betrayed  that  trust  for  their  private  profit.  The  Public 
Ownership  League  and  the  thoughtful  public  at  large  believe  that 
it  would  work  a  gross  injustice  to  the  Nation  to  take  the  railroads 
as  they  are  looted  and  over  capitalized,  and  make  good  to  the  owners 
all  of  the  wicked  and  foolish  speculations  of  the  past,  without  respect 
to  the  actual  value  of  the  properties  now  devoted  to  raihoad  pur- 
poses. It  is  not  our  desire  to  be  destructive  in  our  suggestions  as 
to  governmental  policies,  but  rather  to  be  constructive  in  the  best 
sense,  with  the  future  success  of  Government  ownership  and  opera- 
tion constantly  in  view. 

Few  people  outside  of  Washington  realize  the  enormous  one- 
sidedness  of  the  proceedings  before  the  Interstate  Commerce  Com- 
mission and  the  committees  of  Congress.  The  railroads  represent 
an  investment  of  many  billions  of  dollars  and  are  naturally  in  a 
position  to  employ  and  do  employ  great  numbers  of  the  most  skillful 
attorneys  to  take  possession  of  the  capital  and  try  to  enforce  their 
views  and  their  will  upon  the  governmental  autnorities  having  to 
do  with  the  determination  of  the  great  problems  at  issue.  The 
league  believes  that  the  future  welfare  of  the  people  of  the  United 
States  will  be  very  greatly  affected  by  the  decisions  now  about  to 
be  made  with  respect  to  two  chief  problems,  as  follows : 

1.  Tlie  extent  o^  the  compensation  to  he  paid  hy  the  Government  for 
the  use  of  the  railroads  during  the  period  oj  private  ownership  and 
Government  operation. — The  primary  importance  of  this  problem 
is  not  in  the  amount  of  compensation  or  rental  that  may  be  paid 
during  the  continuance  of  the  war  or  for  the  brief  period  of  years 
during  which  the  scheme  of  private  ownership  and  governmental 
operation  continues,  but  in  the  effect  that  the  payment  of  such 
compensation  and  the  agreements  made  with  respect  to  it  have 
upon  the  ultimate  purchase  price  of  the  roads  when  their  ownership 
passes  from  private  hands  to  the  Government.  The  establishment 
of  a  fixed  compensation  or  rental  to  continue  so  long  as  governmental 
operation  of  privately  owned  roads  continues  will  naturally  have 
the  effect  of  determining  the  earning  power  of  the  property  from  the 

E resent  time  on  to  the  time  when  the  purchase  price  therefor  is  to 
e  fixed,  and  if  the  compensation  or  rental  is  excessive,  the  result 
may  be  the  addition  of  several  billion  dollars  to  the  permanent 
burdens  of  the  transportation  systems  of  the  country.  With  the 
railroads  as  with  public  utilities,  it  is  of  the  utmost  importance  to  the 
consuming  public  that  the  recognized  capital  value  shall  be  kept 
as  low  as  practicable  and  shall  not  be  swelled  by  the  capitahzation 


FEDERAL  OPERATION   OF   TRA.NSPORTATION   SYSTEMS.  919 

against  the  public  of  gratuities  and  special  privileges  conferred  upon 
the  transportation  companies  in  times  of  great  public  need  and 
danger. 

2.  The  principles  of  valuation  to  he  applied  in  determining  the  value 
of  the  physical  a'ssets  of  the  railroads. — Valuation  is  a  technical  and 
difficult  problem,  largely  hypothetical,  with  which  the  average 
city  is  not  familiar.  Even  many  well-informed  persons  suppose 
that  the  value  placed  upon  a  pubUc  utihty  property  by  a  skillful 
engineer  is  an  ultimate  fact  which  must  be  accepted  by  all  parties 
without  question.  In  truth,  however,  the  final  valuation  even  of  the 
physical  property  of  a  railroad  or  any  oth^r  public  utility  is  built 
upon  a  series  of  assumptions  and  by  the  application  of  a  series  of 
rules  with  respect  to  each  one  of  which  the  particular  interests  and 
judgment  of  the  engineers  doing  the  work  have  great  influence. 
Concealed  in  a  final  valuation  are  many  technical  questions  which 
are  matters  of  grave  doubt  and  with  respect  to  which  the  interests 
of  the  public  and  of  the  public-service  corporations  are  diametrically 
opposed.  As  applied  to  the  railroads  of  the  United  States,  the 
difierence  in  the  principles,  advocated  at  many  points  in  the  valua- 
tion work,  affect  the  final  results  to  the  extent  of  hundreds  of  millions 
or  even  biUions  of  dollars. 

The  principles  to  be  applied  respecting  the  capitalization  of  the 
railroads  in  fixing  their  compensation. — ^As  it  will  require  about  three 
more  years  for  the  Interstate  Commerce  Commission  to  complete 
its  report  on  the  physical  valuations  of  the  railroads,  and  as  the  true 
amounts  of  money  actually  and  legitimately  invested  have  been  so 
completely  hidden  by  irregular  accounting  and  the  burning  of  books 
and  records  to  conceal  the  facts,  the  true  capitalization  is  at  present 
unknown.  On  this  account  I  shall  mtroduce  herewith  evidence  and 
the  official  findings  of  the  Interstate  Commerce  Commission  to  show 
that  the  present  capitalization  as  claimed  in  every  case  examined  is 
without  any  vestige  of  reliabihty,  and  is  swelled  to  many  times  the 
true  amount  by  extravagance  and  speculations  outside  of  railroad 
purposes.  In  consequence  to  these  facts,  I  recommend  that  further 
mvestigations  be  instituted  with  all  speed,  with  the  view  of  ascer- 
taining the  true  and  legitimate  capital  investments  on  which  only, 
and  not  on  water,  the  Government  compensation  to  the  railroads 
should  be  based,  until  the  physical  valuations  be  also  completed. 

In  the  above  connection  I  respectfully  suggest  that  the  willful 
falsifying  of  records  and  the  destruction  of  accounts  be  included  in 
the  section  of  the  bill  respecting  criminal  acts  and  punished  accord- 

I  also  respectfully  suggest  that  the  bill  provide  for  a  continuing 
lien  upon  the  railroads  in  favor  of  the  Government  for  any  over- 
payments which  may  be  made;  that  the  extravagant  salaries  paid 
m  some  instances  be  revised,  and  all  salaries  be  based  upon  the 
value  of  the  services  rendered;  that  'income  on  surplus,"  which  is 
income  on  income,  be  eHminated ;  and  that  if  for  temporary  purposes 
it  be  based  on  the  average  income  of  preceding  years,  the  period 
should  be  extended  to  include  the  past  ten  years,  rather  than  for 
the  period  proposed  of  three  war  years  with  their  excessive  profits. 

Most  important  of  all  the  recommendations  which  I  have  the 
honor  to  submit  to  you  is  that  Congress  shall  at  the  earhest  possible 


920  FEDERAL  OPERATION   OF   TRANSPORTATION   SYSTEMS. 

date  pass  an  act  providing  for  the  public  ownership  of  transporta- 
tion systems  for  the  carrying  of  passengers  and  freight  as  well  as  the 
telegraph  and  telephone  systems,  to  accomplish  which  I  am  engaged 
in  consultation  with  practical  students  of  the  problem  in  the  draftmg 
of  a  bill  providing  for  this  great  step,  necessary  to  the  emancipation 
of  the  people  of  this  country  from  the  rule  of  special  privilege. 

When  traveHng  in  France  for  the  first  time  many  years  ago,  I 
observed  over  the  entrance  of  all  of  their  churches  as  well  as  public 
buildings  the  following  motto,  which  is  also  the  motto  of  the  French 
Revolution:  "Liberty,  equahty,  fraternity."  Equahty  here  means 
equality  of  opportunity,  and  when  a  few  are  given  the  right  to 
control  the  great  functions  of  Government  which  are  thus  denied 
to  the  general  citizenship,  equality  of  opportunity  can  not  exist. 
There  can  be  no  more  natural  and  necessary  function  of  government 
for  promoting  general  prosperity  and  happiness  than  the  public 
ownership  as  well  as  governmental  operation  of  all  these  agencies 
which  contribute  to  the  public  good  and  which  by  their  nature  are 
monopolies.  This  includes  not  only  the  means  of  transporting  pas- 
sengers, freight,  and  intelUgence,  but  also  means  those  vast  resources 
of  nature  as  well,  which  the  Almighty  placed  under  the  ground  for 
the  service  of  all  of  his  creatures. 

Public  ownership  is  also  fundamental  to  democracy,  without  which 
civil  hberty  can  not  exist. 

Herewith  I  respectfully  submit  the  evidence  on  which  my  con- 
clusions are  based  regarding  the  finances  and  practices  of  the  Amer- 
ican railroads;  and  in  closing  I  desire  again  to  express  my  high 
respect  for  the  patriotism  and  forward  vision  of  the  President  m 
this  crisis. 

The  illegal  and  jraudulent  practices  oj  the  American  railway  com- 
panies  in  the  falsifying  of  their  accounts  to  cover  up  the  expenditures  of 
the  stoclcholders^  money  for  influencing  and  controlling  legislation^ 
politics,  and  the  press;  the  frauds  practiced  hy  directors  in  talcing  for 
their  private  use^  the^  funds  of  the  company;  the  deceptive  accounting 
regarding  capitalization,  investment,  etc.,  and  the  burning  of  the 
hoolcs  and  records  to  secure  secrecy  of  their  acts,  as  shown  %n  the 
official  reports  of  the  Interstate  Commerce  Commission. — During  the 
years  from  1912  to  1915  various  complaints  were  made  by  shippers 
and  the  public  to  Congress  and  the  Interstate  Commerce  Commission 
respecting  certain  illegal  practices  of  four  important  systems  of  rail- 
ways and  their  resulting  inefficiency  of  service  and  unjust  rates.  On 
account  of  these  complaints,  which  seemed  well  substantiated,  the 
Interstate  Commerce  Commission,  partly  on  its  own  initiative  and 
partly  in  compliance  with  resolutions  of  Congress,  made  investiga- 
tions, and  issued  their  official  reports  of  findings,  in  the  years  1913  to 
1917,  respecting  the  unlawful  practices  and  financial  transactions  of 
the  following  four  railway  systems : 

The  New  York,  New  Haven  &  Hartford  Railroad  Co.,  Report  No. 
6569;  date,  July  11,  1914. 

The  Louisville  &  Nashville  Railroad  Co.,  Report  No.  4788;  date, 
February  9,  1915. 

The  Chicago,  Rock  Island  &  Pacific  Railway  Co.,  Report  No.  6834 ; 
date,  July  31,  1915. 

The  Cincinnati,  Hamilton  &>  Dayton  Railroad  Co.  and  the  Pere 
Marquette  Railroad  Co.,  Report  No.  6833;  date,  March  13,  1917. 


FEDERAL  OPEBATION   OF   TEANSPORTATION  SYSTEMS.  921 

These  investigations  were  made  with  the  most  painstaking  care 
possible,  covering  long  periods  of  time,  in  which  special  agents  of  the 
commission  were  employed  to  secure  information  and  to  investigate 
the  books  and  accounts,  and  officers  of  the  companies  were  summoned 
before  the  commission,  severah  thousand  pages  of  testimony  being 
taken.  Tlie  findings  of  the  commission  were  published  in  their 
official  reports  mentioned  and  disclose,  among  others,  the  following 
facts : 

The  evidence  secured  by  the  commission  shows  that  every  railroad 
company  investigated  knowingly  falsified  their  accounts,  partly  in 
order  to  hide  expenditures  of  large  sums  for  controlling  politics  and 
elections  and  influencing  legislation  and  the  administration  of  laws ; 
falsified  the  accounts  respecting  capital,  expenses,  and  profits,  so  that 
the  commission,  in  many  instances,  was  unable  to  find  for  what 
purpose  vast  sums  were  expended;  and  in  many  cases  the  books  and 
accounts  were  burned  by  the  directors  in  order  to  hide,  in  so  far  as 
possible,  various  illegal  transactions.  Many  of  these  acts  were  done, 
as  the  records  conclusively  show,  by  directors  who  are  well  known 
as  among  the  world's  greatest  financiers;  yet  even  though  many 
records  were  -svillfully  destroyed,  the  commission  was  able  to  secure 
sufficient  evidence  in  many  cases  to  disclose  the  names,  dates,  and 
facts. 

In  order  to  place  the  various  illegal  practices  in  systematic  order  and 
to  refer  to  official  evidence  and  the  findings  of  the  commission,  they 
may  be  briefly  classified  as  follows : 

1.  Extravagant  speculations  and  purchases  of  worthless  securities 
in  the  interests  erf  the  directors;  peculations  from  the  stocldiolders' 
money  by  illegal  devices,  accompanied  by  the  falsifying  of  books  and 
accounts  and  their  later  burning  by  the  directors. 

2.  Illegally  spending  the  stockholders'  money  and  property  to 
corruptly  influence  politics,  the  press,  and  public  opinion  and  to 
secure  secrecy  respecting  their  acts. 

3.  Acts  to  secure  a  monopoly  against  the  public  interest,  by  the 
violation  of  the  laws  of  many  States  as  well  as  of  the  Nation. 

4.  The  organization  by  the  railway  directors  of  "fake"  corpora- 
tions, with  ''dummy"  officers  to  hide  the  identity  of  the  real  pro- 
moters and  shield  them  from  prosecution. 

5.  The  voting  to  themselves  by  the  directors  of  extravagant  sal- 
aries, in  addition  to  which  large  sums  were  taken  by  some  of  these 
officials  without  warrant  of  law. 

The  various  acts  recited  are  necessarily  interwoven  and  will  be 
grouped  by  subjects  as  systematically  as  convenient. 

The  wasting  of  the  companies'  resources  in  extravagant  specula- 
tion, and  the  burning  of  the  records:  The  following  extracts  are  from 
the  official  report.  No.  6569,  of  the  Interstate  Commerce  Commission 
respecting  the  New  York,  New  Haven  &  Hartford  Raikoad  Co., 
July  11,  1914.  AU  the  extracts  from  the  commission's  reports 
respecting  the  various  railway  systems  are  taken  verbatim  from 
the  records. 

Public  hearings  were  held  extending  over  a  period  of  60  days  of  almost  continuous 
session.  Witnesses  in  a  position  to  have  knowledge  of  the  transactions  under  scrutiny 
were  examined.  In  the  search  for  truth  the  commission  had  to  overc(toie  many 
obstacles,  such  as  the  burning  of  books,  letters,  and  documents  and  the  obstinacy  of 
witnesses  who  declined  to  testify  until  criminal  proceedings  were  begun  for  their 


922  FEDERAL   OPERATION    OF    TRANSPORTATION    SYSTEMS. 

refusal  to  answer  questions.  The  New  Haven  system  has  more  than  300  subsidiary 
corporations,  in  a  web  of  entangling  alliances  with  each  other,  many  of  which  were 
seemingly  planned,  created,  and  manipulated  by  lawyers  expressly  retained  for  the 
purpose  of  concealment  or  deception.  Ordinarily  in  investigations  of  this  character 
evidence  is  easily  adduced  by  placing  the  witnesses  upon  the  stand,  but  in  this  in- 
vestigation the  witnesses  other  than  the  accountants  for  the  commission  were  in  the 
main  hostile,  and  with  few  exceptions  their  testimony  was  unwillingly  given. 

The  result  of  our  research  into  the  financial  workings  of  the  former  management  of 
the  New  Haven  system  has  been  to  disclose  one  of  the  most  glaring  instances  of  malad- 
ministration revealed  in  all  the  history  of  American  railroading'  In  the  course  of  the 
investigation  many  instances  were  uncovered  of  violation  of  the  laws  of  different 
States.  As  these  were  not  understood  to  be  pertinent  to  our  inquiry  vmder  the  Senate 
resolution  we  did  not  follow  them  into  their  details.  As  pointing  to  violations  of  State 
laws,  we  have  turned  over  the  evidence  concerning  local  occurrences  in  New  York 
City  to  the  district  attorney  for  the  proper  district,  and  the  testimony  relating  to 
irregularities  in  Massachusetts  and  Rhode  Island  have  been  laid  before  the  proper 
authorities  of  those  States.  The  commission  has  also  furnished  the  Department  of 
Justice  with  a  complete  record  of  the  testimony. 

The  difficulties  under  which  tliis  railroad  system  has  labored  in  the  past  are  internal 
and  wholly  due  to  its  own  mismanagement.*  Its  troubles  have  not  arisen  because  of 
regulation  by  governmental  authority.  Its  greatest  losses  and  most  costly  blunders 
were  made  in  attempting  to  circumvent  governmental  regulation  and  to  extend  its 
domination  beyond  the  limits  fixed  by  law. 

The  subject  matter  of  this  inquiry*  relates  to  the  financial  operation  of  a  railroad 
system  which,  on  June  30, 1903,  had  a  total  capitalization  of  approximately  193,000,000, 
of  which  $79,000,000  was  stock  and  $14,000,000  bonds.  In  the  10  years  from  June  30, 
1903,  this  capitalization  was  increased  from  $93,000,000  to  $417,000,000,  exclusive 
of  stock  premiums,  or  an  increase  of  $324,000,000.  Of  this  increase  approximately 
$120,000,000  was  devoted  to  its  railroad  property  and  was  espended  for  betterments 
and  equipment.  This  leaves  the  sum  of  $204,000,000,  which  was  expended  for  opera- 
tions outside  of  its  railroad  sphere.  Through  the  expenditure  of  this  sum  this  railroad 
system  has  practically  monopolized  the  freight  and  passenger  business  in  five  of  the 
States  of  the  Union.  It  has  acquired  a  monopoly  of  competing  steamship  lines  and 
trolley  systems  in  the  section  which  it  serves.  The  financial  operations  necessary  for 
these  acquisitions,  and  the  losses  which  they  have  entailed,  have  been  skillfully  con- 
cealed by  the  juggling  of  money  and  securities  from  one  subsidiary  corporation  to 
another. 

SIGNIFICANT   INCIDENTS. 

Marked  features  and  significant  incidents  in  the  loose,  extravagant,  and  improvident 
administration  of  the  finances  of  the  New  Haven  as  shown  in  this  investigation  are  the 
Boston  &  Maine  despoilment;  the  iniquity  of  the  Westchester  acquisition;  the  double 
price  paid  for  the  Rhode  Island  trolleys;  the  recklessness  in  the  purchase  of  Connecti- 
cut and  Massachusetts  trolleys  at  prices  exorbitantly  in  excess  of  their  market  value; 
the  unwarranted  expenditure  of  large  amounts  in  ''educating  public  opinion";  the  dis- 
position, without  knowledge  of  the  directors,  of  hundreds  of  thousands  of  dollars  for 
influencing  public  sentiment;  the  habitual  payment  of  unitemized  vouchers  without 
auy  clear  specification  of  details;  the  confusing  interrelation  of  the  principal  company 
and  its  subsidiaries  and  consequent  complication  of  accounts;  the  practice  of  financial 
legerdemain  in  issuing  large  blocks  of  New  Haven  stock  for  notes  of  the  New  England 
Navigation  Co.,  and  manipulating  these  securieties  back  and  forth;  fictitious  sales  of 
New  Haven  stock  to  friendly  parties  with  the  design  of  boosting  the  stock  and  unload- 
on  the  public  at  the  higher  "market  price";  the  unlawful  diversion  of  corporate 
funds  to  political  organizations;  the  scattering  of  retainers  to  attorneys  of  five  States, 
who  rendered  no  itemized  bills  for  services  and  who  conducted  no  litigation  to  which 
the  railroad  was  a  party;  extensive  use  of  a  paid  lobby  in  matters  as  to  which  the  di- 
rectors claim  to  have  no  information;  the  attempt  to  control  utterances  of  the  press 
by  subsidizing  reporters;  payment  of  money  and  the  profligate  issue  of  free  passes  to 
legislators  and  their  friends;  the  investment  of  $400,000  in  securities  of  a  New  England 
newspaper;  the  regular  employment  of  political  bosses  in  Rhode  Island  and  other 
States,  not  for  the  purpose  of  having  them  perform  any  service,  but  to  prevent  them, 
as  Mr.  Mellen  expressed  it,  from  ''becoming  active  on  the  other  side' ';  the  retention  by 
John  L.  Billard  of  more  than  $2,700,000  in  a  transaction  in  which  he  represented  the 
New  Haven  and  into  which  he  invested  not  a  dollar;  the  inability  of  Oakleigh  Thorne 
to  account  for  $1,032,000  of  the  funds  of  the  New  Haven  intrusted  to  him  in  carrying 
out  the  Westchester  proposition;  the  story  of  Mr.  Mellen  as  to  the  distribution  of 
$1,200,000  for  corrupt  purposes  in  bringing  about  amendments  of  the  Westchester  and 


FEDERAL  OPERATION  OF  TRANSPORTATION  SYSTEMS.     92  S 

Port  Chester  franchises;  the  domination  of  all  the  affairs  of  this  railroad  by  Mr. 
Morgan  and  Mr.  Mellen  and  the  absolute  subordination  of  other  members  of  the  board 
of  directors  to  the  will  of  these  two;  the  unwarranted  increase  of  the  New  Haven 
liabilities  from  $93,000,000  in  1903  to  $417,000,000  in  1913;  the  increase  in  floating 
notes  from  nothing  in  1903  to  approximately  $40,000,000  in  1913;  the  indefensible 
standard  of  business  ethics  and  the  absence  of  financial  acumen  displayed  by  eminent 
financiers  in  directing  the  destinies  of  this  railroad  in  its  attempt  to  establish  a  monop- 
oly of  the  transportation  of  New  England.  A  combination  of  all  these  has  resulted  in 
the  present  deplorable  situation  in  which  the  affairs  of  this  railroad  are  involved. 

Pages  35  to  41  of  the  report  give  a  history  of  the  celebrated  trans- 
action in  which  18  miles  of  railroad,  in  which  Directors  J.  P.  Mor- 
gan, sr.,  WiUiam  Rockefeller,  and  Mr.  MiUer  were  interested  was 
unloaded  by  them  on  the  railroad  company  at  a  meeting  kept  secret 
from  the  rest  of  the  board  of  directors,  at  which  meeting  President 
MeUen  presided.  This  property  proved  to  be  more  than  worthless 
to  the  stockholders,  having  been  operated  at  an  annual  loss  of  over 
$1,000,000,  and  for  which  their  directors  forced  them  to  pay  the 
vast  sum  of  $36,434,173.25. 

The  principal  accounts  respecting  this  transaction  were  kept  in 
the  office  of  J.  P.  Morgan  &  Co.  in  such  a  manner  as  to  hide  the  pur- 
poses for  which  moneys  were  received  or  expended,  under  the  title 
of  '^Special  Account  No.  2."  Part  of  the  accounts  were  kept  by 
another  banker  interested  in  the  transaction  named  Oakleight  Thorne, 
respecting  which  the  commission  report  says : 

It  appeared  during  the  progress  of  this  investigation  that  the  personal  records  of 
Thorne  which  might  have  shown  the  details  of  these  disbursements  had  been  biu-ned 
by  him  in  January,  1912. 

This  transaction  is  all  the  more  sensational  since  the  president  of 
the  road  was  not  permitted  by  the  directors,  who  robbed  it  to  the 
extent  of  millions  of  dollars,  to  know  who  got  the  money. 

Another  startling  fact,  the  exact  counterfeit  of  which  may  perhaps 
often  have  occurred  in  the  history  of  American  railroading,  but  never 
before  known  and  published,  is  revealed  in  this  investigation  respect- 
ing this  road.  The  record  shows  conclusively  that  President  Mellen 
of  the  road  was  practically  appointed,  or  selected,  at  the  instigation 
of  J.  P.  Morgan,  sr.,  and  when  this  '^president"  desired  to  ascertain 
the  facts  respecting  the  transaction  in  which  the  road  was  robbed 
by  a  conspiracy  of  Mr.  Morgan  with  three  other  directors  without 
the  knowledge  of  the  rest  of  the  board,  '^ President"  Mellen  was  not 
permitted  by  Mr.  Morgan  to  know  (as  he  expressed  it  over  his  official 
signature  as  disclosed  in  the  record)  ''Who  got  the  money  for  the 
truck  turned  over." 

The  following  is  from  the  report: 

THE    NEW    YORK,    WESTCHESTER    &    BOSTON    RAILWAY    CO, 

The  Westchester  is  a  story  of  the  profligate  waste  of  corporate  funds.  The  road  was 
not  necessary  as  a  part  of  the  New  Haven  system.  It  parallels  other  lines  already 
owned  by  the  New  Haven  and  traverses  territory  which  the  New  Haven  already 
served.  That  it  was  recognized  as  unnecessary  by  the  New  Haven  itself  at  its  incep- 
tion is  evidenced  by  the  fact  that  the  New  Haven  sought  an  injunction  to  restrairi  the 
construction  of  this  road  on  the  specific  ground  that  it  was  not  in  answer  to  any  piiblic 
necessity  and  paralleled  its  already  existing  line. 

The  enormous  sum  of  $36,434,173.25  was  expended  for  a  road  only  18.03  miles  in 
extent,  which  is  being  operated  at  an  annual  loss  of  approximately  $1,250,000,  and 
which  will  have  to  increase  its  earnings  four  and  one-half  fold  before  it  can  pay  its 
operating  expenses  and  fixed  charges.  It  is  inconceivable  that  this  enterprise  could 
have  been  entered  into  by  the  New  Haven  as  a  result  of  the  mandates  of  good  judgment 
and  proper  railroading. 


924  FEDERAL  OPERATION   OF   TRANSPORTATION   SYSTEMS. 

The  Westchester  acquisition  was  planned  and  executed  by  a  special  committee  of 
the  board,  consisting  of  directors  Morgan,  Rockefeller,  and  Miller,  with  President 
Mellen  as  chairman.  The  vote  appointing  this  committee  "on  proposed  competition 
between  the  Connecticut  State  line  and  Harlem  River,  with  power,"  does  not  disclose 
an  intention  to  authorize  the  buying  of  charters  and  promotion  securities  and  the 
building  of  a  new  railroad,  much  less  one  at  a  cost  of  $36,000,000.  It  is  ambiguous 
and  was  evidently  intended  to  conceal  a  secret  purpose.  The  full  board  was  not 
taken  into  the  confidence  of  those  directors  who  wanted  these  securities  purchased, 
and  no  report  was  ever  made  by  this  committee  placing  the  situation  as  they  found  it 
before  the  board.  "        . 

The  first  information  the  board  had  concerning  the  extravagant  acquisition  of 
Westchester  and  Port  Chester  securities  was  on  November  8,  1907,  when  this  com- 
mittee made  its  only  report.  It  was  then  learned  that  $11,155,000  had  been  ex- 
pended in  obtaining  control  of  these  two  insolvent  promotion  schemes,  and  that  tliis 
expenditure  carried  with  it  an  obligation  to  construct  two  railroads,  under  franchises 
of  doubtful  validity,  paralleling  the  existing  line  of  the  New  Haven. 

There  is  no  record  that  this  committee  ever  required  from  these  parties  an  itemized 
statement  of  the  disbursements  they  made  of  the  funds  advanced  from  "special 
account  No.  2  " ;  nor  was  any  such  statement  ever  rendered.  No  vouchers  were  taken. 
Special  account  No.  2  on  the  books  of  J.  P.  Morgan  &  Co.  shows  nothing  more  than  the 
lump  sums  received  from  the  New  Haven  and  the  disbursement  of  the  same  to  Thome 
and  later  to  the  Millbrook  Co.,  on  notes  of  the  respective  payees.  It  appeared  during 
the  progress  of  this  investigation  that  the  personal  records  of  Thome  which  might  have 
shown  the  detail  of  these  disbursements  had  been  burned  b_y  him  in  January,  1912. 

In  a  letter  of  October  30,  1906,  to  C.  S.  Mellen  from  the  attomey,  Francis  Lynde 
Stetson,  who  was  representing  all  the  parties  in  the  deal,  namely,  J.  P.  Morgan  &  Co., 
the  Millbrook  Co.,  Perry  &  Thome,  and  the  New  York,  New  Haven  &  Hartford  Rail- 
road Co.,  there  is  the  following  language  which  is  significant  as  to  the  course  the 
committee  was  pursuing: 

"Referring  to  the  conversation  this  morning  between  yourself,  Mr.  Thome,  and 
myself,  it  has  occurred  to  me  that  it  is  possible  that  Mr.  Thome's  purchases  and  even 
his  payments  may  have  to  begin  before  he  shall  have  ascertained  the  validity  of  the 
two  principal  charters  which  he  is  to  acquire,  and  that  in  the  event  of  the  develop- 
ment subsequently  of  their  invalidity  it  might  be  that  the  money  spent  would  be 
money  lost." 

The  report  of  this  committee,  however,  was  unanimously  "approved,  ratified,  and 
confirmed"  at  the  meeting  of  the  board  of  November  8,  1907,  at  which  the  following 
directors  were  present:  Mellen,  Rockefeller,  Morgan,  Milner,  Thayer,  Brooker,  Brush, 
Warner,  Cheney,  Miller,  Skinner,  Barney,  Taft,  Wittemore,  JElton,  Hemingway, 
Robertson,  Robbins,  and  Parker, 

After  this  meeting  of  the  board  at  which  this  undetailed  report  was  ratified,  Mr. 
Mellen  went  to  see  Mr.  Morgan  and  requested  more  information  as  to  the  expenditure 
of  the  amounts.  According  to  Mr.  Mellen 's  evidence,  Mr.  Morgan  asked  him  if  he 
knew  who  wrote  the  report,  and  upon  Mr.  Mellen 's  reply,  "Yes;  Mr.  Stetson  wrote 
it,"  Mr.  Morgan  asked  him,  "Do  you  think  you  know  more  than  Stetson  "?  Mr. 
Mellen  admitted  he  did  not,  and  apparently  acquiesced,  but  took  the  precaution  to 
write  upon  the  back  of  his  report,  while  still  smarting  under  the  humiliation  of  the 
interview  with  Mr.  Morgan,  the  following  words: 

"The  trouble  with  this  is  there  is  nothing  to  show  who  got  the  money  for  the  truck 
turned  over.  I  don't  like  the  looks  of  it,  and  I  don't  see  why  the  matter  should  not 
be  made  plain.  If  I  had  the  stock  and  sold  it,  I  should  expect  others  would  state 
they  bought  it  of  me;  but  that  don 't  seem  to  have  been  the  disposition  here.  I  never 
have  known  the  first  thing  about  who  originally  held  the  securities,  what  the/  were 
sold  for,  and  no  one  has  thought  I  was  entitled  to  know.  Perhaps  I  am  not.  I  would 
feel  better  if  there  were  at  least  a  disposition  to  let  me  know  something  more  than 
appears  in  the  record. 

"C.  S.  M." 
♦  *  *  ■       *  •»  *  * 

There  were  just  thirteen  things  that  had  to  be  done,  according  to  Mr.  Mellen,  to  get 
the  Westchester  out  of  its  franchise  difficulties,  and  it  is  significant  that  all  amendments 
to  fhe  franchises  were  obtained,  and  the  sequence  was  that  the  New  Haven,  in  addi- 
tion to  these  things,  received  30,431  of  the  34,053^  outstanding  shares  of  the  New 
York,  Westchester  &  Boston  Railroad  Co.  stock,  which  Mr.  Mellen  testified  was  not 
worth  10  cents  a  pound.  The  testimony  is  somewhat  occult,  but  the  character  of  the 
transaction  is  no  less  certain.  This  money  was  used  for  corrupt  purposes  and  the 
improper  expenditures  covered  up  by  the  transfer  to  the  New  Haven  of  these  worthless 
securities. 


FEDERAL  OPERATION   OF   TRANSPORTATION   SYSTEMS.         .  925 

The  committee  had  kept  minutes  of  its  meetings,  which  were  filed  with  its  report, 
but  these  show  little  beyond  the  authorizations  to  the  president  of  the  New  Haven 
to  deposit  large  amounts  from  time  to  time  with  J.  P.  Morgan  &  Co.  in  an  account 
which  appeared  on  the  books  of  that  banking  firm  as  "special  account  No.  2."  The 
committee  made  a  contract  with  Oakleigh  Thome  and  Marsden  J.  Perry,  both  presi- 
dents of  banks  which  were  large  creditors  of  the  companies  whose  securities  were  to 
be  acquired.  The  contract  authorized  and  required  Thome  and  Perry  to  purchase 
for  the  New  Haven  66  per  cent  of  the  stock  of  the  several  companies,  and  when  this 
was  done  they  were  to  construct  the  railroad .  The  contract  is  remarkable  in  that  no 
limit  is  placed  on  the  amount  that  might  be  paid  for  the  securities  or  expended  in 
building  the  road,  but  these  parties  were  to  receive,  as  commission  for  their  services, 
7^  per  cent  of  the  amount  expended. 

*  *  *  *  *  *  * 

To  this  (igure,  however,  must  be  added  the  $14,090,008.18  expended  before  the 
construction  began,  making  a  total  of  $86,434,173.25,  which  yields  the  remarkable 
per-mile  cost  of  $2,020,752.81. 

In  providing  the  money  for  this  construction  bonds  to  the  extent  of  $17,000,000, 
sold  at  a  discount  of  $1,20*0,000,  were  issued  on  the  property,  bearing  the  guaranty  of 
the  New  Haven.  This  guaranty  has  meant  a  drain  on  the  New  Haven  resources  of 
$1,250,000  per  annum,  since  the  earnings  of  the  Westchester  fall  this  far  short  of  paying 
the  fixed  charges  on  the  property.  The  president  of  the  Westchester  testified  that  the 
earnings  of  his  road  would  have  to  increase  4^  times  before  the  Westchester  will  become 
self-sustaining. 

WTiat  could  have  been  the  motive  for  unloading  the  Westchester  upon  the  New 
Haven  at  the  expense  of  the  stockholders  of  the  latter  must  be  left  largely  to  con- 
jecture. The  one  accomplished  result,  however,  of  the  Westchester  transaction  was 
the  stifling  of  possible  competition  into  New  York  City  from  New  England. 

The  blame  for  the  Westchester  rests  squarely  upon  the  directors  of  the  New  Haven 
road.  Some  are  guilty  for  acts  committed;  others,  the  greater  number,  for  their 
failure  to  act.    They  are  alike  culpable  and  responsible  to  the  stockholders. 

Maladministration  costs  the  stocJchoMers  over  $20,000,000. — On  pages 
55  and  56  is  the  following: 

THE    NEW    ENGLAND    INVESTMENT    A   SECURITY   CO. 

This  company  and  its  affairs  constitute  a  striking  illustration  of  the  deliberate 
attempt  to  entangle  the  New  Haven  with  street  railways  which  has  recently  been 
publicly  avowed  by  former  president  Mellen.    *    *    *       ' 

The  Supreme  Judicial  Court  of  Massachusetts  (198  Mass. ,  413)  decided  in  substance 
that  this  company  was  not  separate  and  independent  of  the  New  Haven,  but  was  a 
mere  device  of  that  company  to  continue  to  hold  stock  in  Massachusetts  trolleys  in 
violation  of  the  laws  of  that  State. 

The  testimony  shows  that  Charles  S.  Mellen  held  control  of  the  common  stock  of 
this  company  through  James  B.  Brady,  as  a  dummy,  until  quite  a  recent  period. 
These  shares  have  been  transferred  to  Sanderson  &  Porter,  a  firm  of  railroad  con- 
tractors and  builders,  who  since  1902  have  from  time  to  time  been  engaged  in  opera- 
tions for  the  New  Haven. 

It  seems  quite  clear,  in  view  of  the  relations  of  this  firm  with  the  New  Haven  in 
the  past,  that  this  stock  is  now  held  by  Sanderson  &  Porter  for  the  New  Haven. 

All  profits  which  this  company  has  made  in  the  past  have  been  the  result  of  trans- 
actions in  the  purchase  and  sale  of  securities  in  which  the  New  Haven  had  title  or 
large  interests,  not  in  the  open  market,  but  under  circumstances  which  would  have 
been  collusive  and  fraudulent  if  this  security  company  was  in  fact  an  independent 
organization  entirely  separate  from  the  New  Haven. 

On  its  note  there  were  turned  over  to  it  at  one  time  $9,918,145.65  of  securities  bought 
and  paid  for  with  New  Haven  funds. 

The  inside  facts  as  to  its  dealings  show  a  continued  operation  in  violation  of  Massa- 
chusetts laws  and  in  flagrant  violation  of  the  injunction  issued  by  the  highest  court 
of  that  State. 

A  summary  of  the  operations  of  the  New  England  Investment  &  Security  Co.,  as 
recorded  on  its  books  appears  in  the  appendix,  identified  as  Exhibit  D. 

Juggling  the  accounts  to  increase  capitalization  and  hide  irregulari- 
ties.~It  has  always  been  a  favorite  device  of  the  American  railroads 
to  print  additional  certificates  of  capital  stock  which  represent  no  real 
value,  and  sell  them  to  the  public;  and  in  other  cases  b}^  the  juggling 


926   .         FEDERAL   OPERATION    OF    TRANSPORTATION    SYSTEMS. 

back  and  forth  of  the  assets  and  accounts  to  suit  the  private  purposes 
of  directors  and  financiers,  to  form  an  excuse  for  increased  rates. 
The  Interstate  Commerce  Commission  refers  to  these  methods  in  the 
following  extracts  from  pages  57-58  of  the  report. 

■QUESTIONABLE    METHODS    EMPLOYED    TO    INCREASE    THE    AMOUNT    OF    CAPITAL    STOCK. 

Increases  in  capital  stock  of  the  New  York,  New  Haven  &  Hartford  Railroad  Co. 
have  been  made  upon  the  basis  of  transfers  of  assets  from  one  subordinate  company 
to  another. 

The  steamship  properties  of  this  system  at  one  time  were  held  by  the  New  England 
Navigation  Co.,  approximating  a  cost  of  $11,500,000.  This  latter  company  in  1907 
transferred  the  title  to  these  steamship  properties  to  the  Consolidated  Railway  Co.  at 
a  value  of  $20,000,000.  The  Consolidated  Railway  Co.  thereupon  increased  its  capital 
fltock  $20,000,000.  The  Consolidated  Railway  Co.  was  then  merged  with  the  New 
Haven,  and  the  stock  of  the  latter  company  increased  $30,000,000,  $20,000,000  of 
which  went  to  the  New  England  Navigation  Co.,  and  placing  in  its  treasury  by  this 
transaction  $20,000,000  Consolidated  Railway  stock,  which  by  the  merger  became 
New  Haven  stock,  with  a  market  value  of  over  $80,000,000.  It  was  this  stock  with 
which  control  of  the  Boston  &  Maine  Railroad  Co.  was  secured. 

MANIPULATION    OF   ACCOUNTS.^ 

Proper  accounting  demands  that  the  records  of  a  company  should  reflect  accurately 
the  transactions  relating  to  the  matter  recorded,  and  where  accounts  fail  to  reveal  a 
true  history  of  the  transactions  it  can  be  due  to  but  one  of  two  causes — carelessness  or 
design. 

Several  transactions  appear  of  record  which  show  that  by  no  stretch  of  imagination 
•can  the  irregularity  of  recording  be  classified  as  due  to  carelessness;  the  following  are 
illustrations: 

In  February,  1911,  the  New  York,  New  Haven  &  Hartford  Railroad  purchased 
23,520^  shares  of  the  Rutland  Railroad  Co.'s  stock  from  the  New  York  Central  & 
Hudson  River  Railroad  Co.,  giving  in  exchange  therefor  its  check  upon  the  Farmers' 
Loan  &  Trust  Co.  in  the  sum  of  $2,364,977.15.  No  entries  can  be  found  in  the  record 
of  the  New  Haven  Co.  which  reveal  this  transaction.  The  stock  thus  acquired  was 
on  the  same  day,  with  a  check  for  $135,022.85,  delivered  to  the  New  England  Navi- 
gation Co.  in  exchange  for  its  note  of  $2,500,000.  The  effect  of  the  recording  of  this 
transaction  is  that  the  sum  paid  the  New  York  Central  for  the  stock  shows  as  a  cash 
advance  to  the  New  England  Navigation  Co. 

February  14,  1910,  the  New  England  Navigation  Co.  sold,  through  the  firm  of  J.  P. 
Morgan  &  Co.,  50,000  shares  of  New  York,  New  Haven  &  Hartford  Railroad  Co.  stock 
at  a  price  of  157  net,  the  cash  proceeds  amounting  to  $7,849,000.  A  check  was 
remitted  by  J.  P.  Morgan  <&  Co.  for  $5,162,203.02  to  the  New  England  Navigation  Co., 
and  16,744  shares  of  Worcester,  Nashua  &  Rochester  stock  were  acquired  for  the 
account  of  the  New  England  Navigation  Co.  at  a  total  cost  of  $2,686,796.98. 

Dummy  companies  formed  to  hide  the  identity  of  railr^oad  officials  as 
to  their  complicity  in  illegal  acts  and  frauds  on  the  stocTdiolders . — The 
following  is  from"  pages  45,  60,  and  61  of  the  official  report: 

Witnesses  who  were  officers  of  some  of  these  companies  appeared  before  the  com- 
mission and  testified  that  they  acted  as  "dummies"  under  the  directions  of  Robbins 
and  of  attorneys  selected  by  him.     Some  of  them  handled,  without  any  knowledge 
of  the  nature  or  purpose  of  the  transactions,  checks  approximating  $3,000,000. 
«  •  *  *  *  *  * 

DUMMY    COMPANIES. 

The  frequency  with  which  dummy  corporations  and  dummy  directors  appear 
in  this  record  leads  to  the  conclusion  that  some  one  high  in  the  councils  of  the  New 
Haven  had  an  obsession  upon  the  subject  of  the  utility  of  such  sham  methods.  ^  The 
directors  of  the  Billard  Co.  confessed  that  they  were  dummies  and  knew  nothing  of 
its  operations.  Why  men  of  respectability  and  standing  as  these  appear  to  be  should 
lend  their  names  as  dummies  passes  comprehension. 

In  the  organization  of  one  of  the  steamship  companies  the  young  lady  stenographer 
was  made  president;  and  a  youth  of  21  years  of  age  by  the  name  of  Grover  Cleveland 
Richards  was  selected  as  treasurer  of  another  company. 


FEDERAL   OPERATION    OF    TRANSPORTATION   SYSTEMS.  927 

Clerks  and  irresponsible  persons  were  drawn  upon  to  supply  the  demand  for  dum- 
mies in  the  financial  joy  nding  by  the  management  of  the  New  Haven.  Mellen's 
stock  in  the  New  England  Investment  &  Secruities  Co.  was  held  by  James  B.  Brady, 
who  testified  that  he  was  merely  a  dummy  for  Mr.  Mellen.  Director  Skinner's  stock 
in  this  same  company  was  held  by  a  relative  and  a  bookkeeper  in  his  office.  Thus, 
throughout  the  entire  story  of  deception,  the  New  Haven  management  vainly  en- 
deavored to  hide  the  true  facts  behind  these  dummy  individuals  and  dummy  cor- 
porations. 

As  a  matter  of  law,  such  devices  are  feeble  and  puerile,  but  if  the  master  financiers 
behind  these  New  Haven  transactions  could  use  these  sham  methods  and  thus  give 
their  indorsement  to  the  availability  of  such  crooked  schemes  to  cover  the  true  sub- 
stance and  fact  of  financial  transactions  it  indicates  a  low  state  of  financial  morality. 
No  condemnation  can  be  too  severe  to  apply  to  the  frequent  use  of  these  companies 
by  the  New  Haven. 

While  in  many  States  there  are  safeguards  established  by  law,  in  other  States  there 
is  such  a  prodigality  in  the  creation  of  corporations  as  to  greatly  prejudice  the  interests 
of  investors,  creditors,  and  the  public  welfare  generally. 

While  stock  in  the  New  Haven  road  was  listed  on  the  New  York  Stock  Exchange  a 
large  portion  of  its  funds  were  invested  in  "blue  sky"  corporations,  the  officers  of 
wluch  knew  nothing  of  the  purposes  or  assets  of  the  companies  of  which  they  were 
managers  or  officers. 

How  the  ojficials  profited  at  the  expense  of  their  roads  hy  contracts 
with  companies  in  which  they  or  their  friends  were  financially  interested. — 
The  records  of  the  New  Haven,  as  well  as  the  other  railway  systems 
investigated,  invariably  show  that  the  officials  did  not  purchase  their 
supplies  in  a  businesslike  manner  and  at  reasonable  prices,  but  at 
extravagant  prices  in  their  own  interest  without  regard  to  that  of 
the  stockholders.  As  this  was  the  general  custom,  and  the  history 
abounds  with  many  transactions,  a  smgle  reference  must  suffice  from 
page  61  of  the  report. 

LARQE  PURCHASES    WITHOUT   BIDS. 

Purchases  of  cars  and  coal  are  two  large  expenditures  that  railroads  make.  The 
New  Haven  purchased  cars  almost  exclusively  from  James  B.  Brady  without  com- 
petition and  to  the  extent  of  some  $37,000,000.  Mr.  Brady,  as  a  witness,  made  no 
secret  of  his  generosity  to  the  officials  with  whom  he  had  business.  His  methods 
were  justified  by  him  on  the  ground  that  the  officers  of  the  New  Haven  were  old 
friends. 

Locomotives  were  purchased  from  a  company  in  which  a  director  of  the  New  Haven 
was  also  a  director.  Many  supplies  obtained  by  the  New  Haven  were  from  companies 
having  directors  who  were  also  directors  of  the  New  Haven. 

Corporate  economy  is  not  practicable  where  gifts  and  obligations  arising  from 
friendship  tend  to  obscure  official  duty. 

The  following  extract  respecting  the  railroads'  expenditures  for 
controffing  poUtics  is  found  on  pages  61-62  of  the  report: 

POLITICAL   CONTRIBUTIONS. 

The  New  Haven  Railroad  had  no  politics.  It  was  Democratic  in  Democratic  States 
and  Republican  in  Republican  States.  As  Mr.  Mellen  testified,  its  effort  was  always 
to  "get  under  the  best  umbrella." 

Payments  made  for  political  purposes  totaled  a  large  sum. 

For  instance,  in  1900,  $50,000  was  contributed  by  the  New  Haven  for  campaign 
purposes  through  J.  P.  Morgan  &  Co.  No  proper  and  complete  voucher  for  this  pay- 
ment appears  on  the  books  of  the  New  Haven  Co. 

In  1904  a  payment  of  $50,000  was  made  through  Mr.  Mellen  for  political  purposes. 
This  was  secretly  done  and  not  reported  to  the  directors  or  stockholders  or  in  any 
manner  made  public. 

No  public-service  corporation  may  rightfully  use  corporate  funds  to  promote  a 
political  cause  or  to  support  a  political  candidate  or  a  political  party. 

A  corporation  as  such  has  no  political  principles  to  maintain  and  no  political  candi- 
dates to  support. 


928  FEDERAL   OPERATION   OF   TRANSPORTATION   SYSTEMS. 

The  revenues  of  a  public-service  corporation  are  for  the  most  part  derived  from  the 
exercise  of  the  right  delegated  to  it  by  the  sovereign  power  to  tax  the  public  by  fixed 
rates  established  in  accordance  with  law.  Shippers  and  the  traveling  public  may  be 
presumed  to  be  divided  in  political  Opinion.  Corporate  revenue  derived  by  public 
tax  from  men  of  one  political  conviction  can  not  be  used  to  support  the  fortunes  of  a 
candidate  or  party  of  contrary  political  principles. 

Regardless  of  the  injustice  to  stockholders  and  travelers  belonging  to  another  party 
which  results  from  such  use  of  funds,  the  withdrawal  from  corporate  use  and  the 
diversion  to  political  use  is  illegal  and  indefensible. 

THE   STEAMSHIPS. 

The  New  Haven,  from  time  to  time,  had  felt  the  harassing  effect  of  competition 
from  the  steamship  lines  that  plied  between  the  several  larger  cities  that  it  served. 
Restless  of  any  limitation  of  his  power,  President  Mellon  proceeded  to  acquire  the 
steamship  lines  and  thereby  stifle  this  interference  with  the  New  Haven  properties. 

The  Hartford  &  New  York  Transportation  Co.  cost  the  New  Haven  $2,538,916.78; 
the  Eastern  Steamship  Corporation  cost  $4,200,000;  the  Merchants  &  Miners'  Trans- 
portation Co.  cost  $5,774,500;  the  New  Bedford,  Marthas  Vineyard  &  Pawtucket 
Steamboat  Co.  cost  $141,700;  the  New  England  Steamship  Co.  cost  $12,100,000;  the 
Maine  Steamship  Co.  $17,300,  or  a  total  of  $24,772,416.78. 

The  testimony  shows  that  the  physical  valuation  of  the  properties  acquired  as  a 
result  of  these  outlays  approximates  something  like  $10,000,000.  The  New  Haven 
advises  that  it  has  recently  disposed  of  its  holdings  in  the  Merchants  &  Miners'  Trans- 
portation Co.  at  a  loss  of  $3,594,500. 

These  steamship  lines  were  not  acquired  by  the  New  Haven  openly,  but  covertly 
and  by  devious  methods.  Dummy  companies,  and  dummy  officers  and  directors 
were  used  in  financial  maneuvering  that  resulted  in  the  New  Haven  controlling 
these  steamships. 

In  connection  with  these  steamship  purchases  it  was  necessary  to  have  piers.  The 
record  shows  money  payments  in  connection  with  pier  leases  which  were  unmis- 
takably improper,  and  these  payments  were  covered  up  by  being  charged  on  the 
books  of  other  companies  to  the  New  Haven  under  such  headings  as  "repairs  on 
steamers." 

There  were  payments  to  one  John  Hall  McKay  of  many  thousands  of  dollars  for 
which  no  itemized  vouchers  were  given.  Mr.  McKay  left  for  Europe  after  this  inves- 
tigation was  commenced,  and  his  evidence  could  not  be  secured.  These  pier  leases 
in  the  city  of  New  York  are  controlled  by  public  officials,  as  the  municipality  owns 
the  piers  and  arrangements  for  the  leases  had  to  be  made  through  these  officials.  But 
because  of  the  methods  employed  to  conceal  these  expenditures  by  increases  of  capital 
stock  and  otherwise,  it  has  been  impossible  to  give  any  total  amount  of  these  payments. 

After  Mr.  Mellen  had  obtained  control  of  every  boat  line  of  any  importance  in  New 
England  he  suddenly  changed  his  attitude  when  the  public  discovered  the  real 
ownership.  It  was  then  that  he  proposed  and  urged  that  they  be  disposed  of,  but 
in  this  he  was  overridden  by  his  board . 

Millions  wasted  in  the  purchase  at  extravagant  prices  of  trolley  lines 
and  steamship  companies  in  which  transactions  a  United  States  Senator 
and  railroad  directors  profited  at  the  expense  oj  their  stockholders, — 
The  following  is  from  pages  41-44  of  the  report: 

RHODE    ISLAND    TROLLEYS. 

The  purchase  of  the  Rhode  Island  trolleys  was  another  instance  of  millions  wasted 
in  acquiring  properties  that  bring  an  annual  deficit  instead  of  a  surplus,  and  con- 
stitute a  liability  instead  of  an  asset  in  the  New  Haven  system. 

^  *  *  *  *  *  •  * 

The  evidence  shows  that  the  Rhode  Island  trolley  transactions  were  deliberately 
entered  into  with  a  full  knowledge  of  the  large  deficit  that  they  would  bring,  and 
with  the  determination  to  acquire  trolley  control  in  Providence  regardless  of  expense. 

A  committee  of  the  board  of  directors  of  the  New  Haven  had  been  appointed  for 
the  purpose  of  looking  into  the  Providence  trolley  "situation,  with  a  view  of  pur- 
chasing that  property,  and  this  committee,  after  considering  the  proposition,  reported 
adversely.  Not  content  to  abide  by  this  action  of  his  board,  Mr.  Mellen,  after  some 
six  months,  revived  the  matter.  This  was  done  after  a  conference  between  Mr. 
Mellen  and  former  Senator  Nelson  W.  Aldrich,  who  was  largely  interested  in  the 
United  Traction  &  Electric  (;!o.,  the  largest  lessor  company. 


FEDERAL  OPERATION   OF   TRANSPORTATION   SYSTEMS.  929 

The  United  Gas  Improvement  Co.,  of  Philadelphia,  that  controlled  this  property 
under  lease,  had  capitalized  the  future  hopes  of  the  proposition  into  a  holding  com- 
pany known  as  the  Rhode  Island  Securities  Co.  and  had  issued  §19,899,tC0  of  deben- 
tures, which  represented  an  investment  of  approximately  only  $6,000,000.  The 
difference  in  these  amounts  was,  as  Mr.  Mellen  testified,  merely  capitalized  water. 

Not  to  be  deterred  by  extravagant  expenditure,  Mr.  Mellen  undertook  to  exchange 
the  debentures  of  the  Providence  Securities  Co.,  which  he  had  created  for  the  purpjse, 
for  these  debentures  of  the  Rhode  Island  Securities  Co.,  and  to  add  thereon  the  guar- 
anty of  the  New  York,  Isew  Haven  &  Hartford  Railroad  Co.,  both  as  to  principal  and 
interest.  1  he  result  of  the  transaction  was  to  enable  the  United  Gas  Improvement 
Co.  to  realize  par  value  on  these  securities  based  merely  upon  lively  expectation  of 
future  possibilities,  and  thereby  immediately  placed  the  burden  of  the  watered  stock 
upon  the  bucks  of  the  New  Haven  stockholders. 

'i  he  millions  that  were  made  from  this  transaction  did  not  come  through  magic,  but 
were  brought  into  existence  at  the  expense  of  the  stockholders  of  the  i\ew  Haven, 
upon  whom  and  the  public  the  yoke  of  giving  value  to  these  securities  ultimately 
rested,  and  the  New  Haven  stock  was  diluted  to  the  extent  of  the  water  thus  added. 
1  his  gas  company  also  owned  some  Connecticut  trolley  lines,  and  it  was  made  a  further 
condition  of  the  Rhode  Island  trolley  acquisition  that  the  New  Haven  take  over  these 
properties. 

When  the  details  had  been  worked  out  by  Mr.  Mellen  for  the  assuming  of  this  addi- 
tional burden  the  board  of  directors  without  question  acquiesced.  Mr.  Mellen  testified 
that  these  Connecticut  trolleys  represented  a  payment  of  about  $10,000,000  more  than 
their  value. 

1  his  transaction  seems  such  an  extravagant  purchase  as  makes  it  a  matter  of  interest 
just  who  owned  the  securities  of  the  Rhode  island  Securities  Co.  Ihis  information 
could  be  furnished  from  the  stock  books  of  that  company,  but  during  the  progres'*  of 
this  investigation  it  was  learned  that  these  books  had  also  been  burned.  A  detailed 
report  on  the  Rhode  Island  trolleys  is  to  be  found  in  the  appendix  made  a  part  hereof, 
Exhibit  B. 

1  he  Rhode  Island  and  Connecticut  trolley  ventures  are  further  evidences  of  the 
prodigality  in  the  expenditure  of  the  money  of  the  New  Haven  stockholders  in  carrying 
out  an  unlawful  policy  of  transportation  monopoly. 

Losses  of  S60,000,000  to  $90,000,000  due  to  waste,  mismanagement, 
and  peculations  by  railroad  officials,  and  attemvts  to  control  'politics,  the 
press,  and  public  opinion, — The  following  is  irom  pages  63-70  of  the 
official  report: 

There  is  the  additional  loss  growing  out  of  the  unfortunate  Billard  transaction  cf 
$2,748,700  unless  John  L.  Billard  is  compelled,  as  he  should  be,  to  make  restitution. 

In  addition  there  have  been  large  expenses  incurred  in  litigation,  in  procurmg 
legislation,  and  in  a  vain  attempt  to  stem  the  tide  of  adverse  popular  opinion. 
*  *  *  ^  *  *  * 

The  annual  deficit  to  the  New  Haven  from  bond  interest,  interest  on  other  obliga- 
tions, and  taxes  resulting  from  the  Westchester  venture  amounts  to  $1,179,243.92. 
When  the  operating  deficit  is  added,  the  total  annual  loss  to  the  New  Haven  is 
$1,657,241.99. 

******* 

These  annual  losses  will,  to  a  large  extent,  recur  from  year  to  year  for  an  indefinite 
period,  and  therefore  represent  large  future  losses. 

From  all  of  the  foregoing  and  from  a  careful  consideration  of  the  method  in  which 
expenditures,  not  specified  herein,  have  been  made,  it  is  submitted  that  a  reasonable 
estimate  of  the  loss  to  the  New  York,  New  Haven  &  Hartford  Railroad  Co.  by  reason 
of  waste  and  mismanagement  will  amount  to  between  $60,000,C00  and  $90,000,000. 

The  splendid  property  of  the  New  Haven  Railroad  itself  will  be  called  upon  for 
many  a  year  to  make  up  the  drain  upon  its  resources  resulting  from  the  unpardonable 
folly  of  the  transactions  outside  the  proper  field  in  which  stockholders  supposed  their 
moneys  were  invested. 

But  honesty  and  efficiency  of  management  of  this  property  as  a  railroad  only  will 
undoubtedly,  in  time,  restore  its  former  standing. 

EVIL  OP  INTERLOCKING   DIRECTORATES. 

A  system  of  interlocking  directorates  has  grown  up  and  flourished  in  the  past  few 
years  which  has  brought  about  combinations  and  intercorporate  relationships  not 
conducive  to  the  public  welfare.     On  the  New  Haven  board  of  directors  there  was  a 

41215—18 2 


930  FEDERAL   OPERATION   OF   TRANSPORTATION   SYSTEMS. 

representative  of  the  Pennsylvania  Railroad,  whicli  railroad  owned  35,000  shares  of 
New  Haven  stock;  there  was  a  representative  of  the  New  York  Central,  which  owned 
35,000  shares;  there  was  a  representative  of  insurance  interests  that  owned  35,000 
shares  and  a  representative  of  an  express  company  tliat  had  a  contract  with  the  rail- 
road; there  were  directors  who  were  also  directors  of  the  Standard  Oil  Co.,  the  United 
Steel  Corporation,  the  Pullman  Co.;  in  fact,  every  other  interest  seemed  better  rep- 
resented on  the  New  Haven  board  than  the  average  stockholder's  interest. 

After  an  exhaustive  investigation  of  this  great  railway  property 
the  commission  summed  up  its  findings  as  follows : 

NEW   HAVEN  MONOPOLY  CORRtJPT. 

This  investigation  has  demonstrated  that  the  monopoly  theory  of  those  controlling 
the  New  Haven  was  unsound  and  mischievous  in  its  eliects.  To  achieve  such  monoi> 
oly  meant  the  reckless  and  scandalous  expenditure  of  money;  it  meant  the  attempt 
to  control  public  opinion;  corruption  of  government;  the  attempt  to  pervert  the 
political  and  economic  instincts  of  the  people  in  insolent  defiance  of  law.  Through 
exposure  of  the  methods  of  this  monopoly  the  invisible  government  which  has  gone 
far  in  its  efi'orts  to  dominate  New  England  has  been  made  visible.  It  has  been  clearly 
proven  how  public  opinian  was  distorted;  how  officials  who  were  needed  and  who 
could  be  bought  were  bought;  how  newspipers  that  could  be  subsidized  were  sub- 
sidized; how  a  college  professor  and  publicists  secretly  accepted  money  from  the  New 
Haven  while  masking  as  a  representative  of  a  gre it  American  university  and  as  the 
.guardians  of  the  interests  of  the  people;  how  agencies  of  information  to  the  public 
-were  prostituted  wherever  they  could  be  prostituted  in  order  to  carry  out  a  scheme 
lOf  private  transportation  monopoly  imperial  in  its  scope. 

DIRECTORS  CRIMINALLY  NEGLIGENT. 

It  is  inconceivable  that  these  wrongs  could  have  gone  on  without  interference  if  the 
members  of  the  boird  of  directors  had  been  true  to  the  faith  they  owed  the  stockholders. 
A  number  of  directors  appear  in  many  instances  to  have  voted  without  knowledge  and 
to  have  approved  the  expenditure  of  many  millions  without  information.  According 
to  the  testimony  of  some  of  the  directors  they  merely  approved  what  had  been  done  by 
some  committee  or  bv  some  officer  of  the  company.  The  directors'  minutes  reveal 
that  it  was  largely  a  body  for  ratification  and  not  authorization  as  the  law  intended  a 
board  of  directors  should  be.  None  of  the  directors  would  have  been  so  careless  in 
the  handling  of  his  own  money  as  the  evidence  demonstrates  they  were  in  dealing 
the  money  of  other  people.  The  directors  actively  or  passively  acquiesced  in  the 
efforts  of  the  Mellon-Morgan -Rockefeller  reirimo  to  extend  the  domination  of  this 
corporation  over  the  whole  transportation  field  in  New  England. 

If  these  directors  who  were  faithless  to  their  stewardship  were  held  responsible  in 
the  courts  and  at  the  bar  of  public  opinion  for  the  failure  to  do  those  things  they  should 
have  done,  the  le.sson  to  directors  who  do  not  direct  would  be  very  salutary. 

Most  of  the  directors  of  the  New  Haven  accej)ted  their  responsibilities  lightly. 
They  failed  to  realize  that  their  names  gave  confidence  to  the  public  and  that  their 
connection  with  the  corporation  led  the  public  to  invest.  When  these  directors  were 
ne  digent  and  serious  losses  resulted  therefrom  they  were  guilty  of  a  grave  dereliction 
of  duty  and  a  breach  of  trust  that  was  morally  wrong  and  criminal  in  its  fruits. 

Directors  should  be  made  indixidually  liable  to  civil  and  criminal  laws  for  the 
manner  in  which  they  discharge  their  trust.  A  corporation  can  be  no  belter  or  worse 
than  those  who  operate  it.  It  should  be  just  as  grave  a  crime  to  plunder  stackholders 
or  the  public  through  a  railroad  corporation  as  it  is  to  personally  rob  an  individual. 

SUBSIDIARY  CORPORATIONS  CONDEMNED. 

It  was  found  in  the  investigation  of  the  New  Haven  system  that  there  were  336 
erbsidiary  orporati  >ns,  and  tne  books  of  the  New  Haven  road  proper  refiect  only  a 
emdl  put  of  the  actual  financial  transactions  of  the  railroad.  Many  of  these  sub- 
Biaiary  (•<  rp  rations  served  no  purpose  save  an  evil  one.  They  were  used  to  cover  up 
transaf  tioiis  that  would  not  bear  scrutinv  and  to  keej)  from  the  eyes  of  pubhc  ofhciala 
m a:er^  tnat  were  sought  to  be  kept  secret.  The  cjmmission  should  have  the  power 
to  e<am  ne  not  on  >r  the  books,  records,  papers,  and  correspondence  of  interstate 
cardeiS  but  of  subsidiary  companies  as  well. 


FEDERAL  OPERATION   OF   TRANSPORTATION  SYSTEMS.  931 

REMEDY   IN    PUBLIC    CONSCIENCE   AND   LAWS. 

The  insiirin;?  of  honestv  thrDuofhoiit  the  manasrement  of  the  ,s;reat  railroads  of  the 
country  is  a  most  imp  >rtant  ritiestion  before  the  people  to-day;  and  only  when,  through 
exp;:)3ure  of  wr)ni:d()ing  and  an  awakened  pub'ic  conscience,  coup'ed  with  effec'tive 
laws,  this  result  is  p-o  luced  may  railroading:  be  placed  u;)  )n  the  hi2:h  level  that  it 
should  occupy.  The  ravel.itions  in  this  record  make  it  essential  for  the  we' fare  of  the 
Nation  that  the  reckless  and  profliij^ate  finanrierinu:  which  has  blighted  this  railroad 
system  be  endod,  and  until  this  is  fully  done  there  vvid  be  no  assurance  that  the  st  )ry 
of  the  New  FTaven  will  not  be  told  again  with  the  stockholders  of  some  other  railroad 
system  as  the  victims. 

THE   CniCAGO,  ROCK  ISLAND   &   PACIFIC  RAILWAY  CO. 

Having  reviewed  some  of  the  principal  transactions  of  the  New 
York,  New  Haven  &  Hartford  Railroad  Co.  in  defrauding  its  stock- 
holdars  and  the  public,  extracts  will  now  be  submitted  from  the 
official  report  of  the  Interstate  Commerce  Commission,  No.  6834, 
dated  July  31,  1015,  entitled  "In  re  Financial  Transactions,  History, 
and  Operation  of  the  Chicago,  Rock  Island  &  Pacific  Railway 
Company.'* 

Owing  to  the  limits  of  space  available  in  this  statement  to  Congress, 
and  having  gone  into  the  transactions  previously  investigated  in 
considerable  detail,  we  will  content  ourselves  witli  brief  extracts 
from  the  official  report  just  mentioned,  which,  when  read  in  full, 
discloses  a  duplication  of  the  illegal  acts  of  the  other  systems  investi- 
gated, together  with  some  new  details  respecting  the  salaries  of  its 
officers  and  the  manner  in  which  they  abstracted,  for  their  private 
uses,  from  the  company  treasury  la^ge  sums  without  accounting 
therefor.  The  same  system  of  false  accounting,  extravagance,  waste, 
and  the  use  of  the  stockholders'  money  for  controlling  politics  and 
the  press  and  for  other  illegal  acts  is  found  in  the  official  report  of  tho 
commission. 

The  result  of  these  illegal  practices  was  to  reduce  the  vahic  of  the 
stock,  which  in  1902  was  $200  a  share,  to  $20  in  1014,  and  to  put  tho 
road  in  the  hands  of  a  receiver — all  in  the  private  interest  of  a 
minority  of  its  directors,  without  the  knowledge  of  the  rest  of  tho 
board,  for  the  purpose  of  further  exploiting  the  stockholders. 

Among  the  acts  so  startling  and  sensational  as  to  vie  in  interest 
with  the  wildest  fiction  may  be  mentioned  the  following: 

The  chairman  of  the  executive  committee,  L.  F.  Loree,  in  addition 
to  a  salary  of  $75,000  per  annum,  demanded  and  received  a  contract 
giving  him  a  present  or  "bonus"  in  an  additional  sum  of  $500,000 
after  the  expirat  ion  of  his  five-year  contract.  Owing  to  trouble  which 
arose  between  him  and  the  rest  of  the  board  after  only  10  months' 
service,  he  was  given  a  "bonus''  of  $450,000  to  quit  the  job,  so  that 
his  compensation  for  10  months  exceeded  $500,000. 

A  majority  of  the  officers  took  money  from  the  company's  treasury 
whenever  they  desired  without  warrant  of  law  or  without  specifying 
the  purpose  the  money  was  to  be  used  for.  A  stockholder  who 
brought  suit  to  secure  an  investigation  and  an  accounting  of  the  acts 
of  the  directors  was  paid  $217,000  to  rehnquish  his  suit  in  order  to 
keep  these  facts  from  public  knowledge. 

The  following  extracts  from  tho  official  report  of  the  commission 
giving  a  sketch  of  the  system,  the  methods  by  which  the  directors 
squandered  the  funds  of  the  stockholders  in  extravagance,  specula- 


932  FEDERAL   OPERATION   OF    TRANSPORTATION    SYSTEMS. 

tion,  and  dishonesty;  and  the  conclusions  of  the  Interstate  Commerce 
Commission  are  found  on  pages  43  to  61  of  the  report. 

In  1902  the  main  line  of  Ihe  Chicajro,  Rock  Island  &  Parific  Iliiilway  Co.  extended 
from  Chicago  to  Denver,  with  branch  lines  to  St.  Paul,  Minneapolis,  and  Kansas  City. 
The  territory  served  is  one  of  the  richest  and  most  prosperous  in  the  country  and  the 
system's  rami fical ion  of  branch  linos  insures  to  it  a  larj^e  volumo  of  tonnage  It  was 
then  thriving  and  its  prosp^vts  were  promising,  its  stock  selling  in  the  markets  of  the 
world  at  more  than  $200  a  share.  In  1914  the  shares  had  fallen  to  $20  and  the  road  is 
now  in  receivers'  hands.  The  evid'"'nce  shows  that  the  earnings  of  the  railway  com- 
pany have  steadily  increased,  and  that  in  1914  they  were  the  largest  in  its  history. 

On  June  4,  1902.  the  capital  stock  of  the  railway  company  was  increa=*ed  to  $75,000,000 
and  the  board  authorized  President  Leeds  to  sell  to  certain  individuals  portions  of  this 
increased  stock  at  par,  although  at  the  time  the  stock  was  quoted  on  the  market  above 
175. 

The  original  articles  of  consolidation  provide  that  the  maximum  of  indebtedness 
to  which  the  company  might  subject  itself  should  not  exceed  two-thirds  of  its  out- 
standing capital  stock.  This  maximum  has  been  increased  from  time  to  time  until 
the  funded  debt  of  the  railway  on  June  30,  1914,  was  $2.38.740,000,  an  increase  of 
nearly  $175,208,000  over  the  amount  outManding  on  June  30,  190].  On  June  30,  1914, 
the  total  capitalization  of  the  railway  company  was  $313,741,000.  Of  this  amount  only 
$75,000,000.  or  28.73  per  cent,  was  capital  stock  on  which  dividends  might  or  might 
not  be  paid,  according  as  the  net  earnings  of  the  fompany  might  or  might  not  warrant. 
The  remainitig  71.27  per  cent  of  the  total  capitalization  coUvsisted  of  interest-bearing 
debt,  including  $3,500,000  of  short-term  loans,  on  which  interest  was  required  to  be 
paid  regardless  of  earnings. 

In  1902  plans  were  laid  by  five  directors  to  form  a  syndicate  and 
holding  company  and  secure  control  of  the  road  to  plunder  and  to 
wreck  it. 

The  following  is  from  the  official  record : 

SYNDICATE   CONTROL. 

In  1901  Daniel  G.  Reid,  W.  H.  Moore,  J.  H.  Moore,  and  W.  B.  Leeds  purchased 
about  $20,000,000  of  stock  of  the  company,  and  by  the  use  of  proxies  they  soon  became 
members  of  the  board  of  directors,  W.  B.  Leeds  being  made  president  and  D.  G. 
Reid  chairman  of  the  executive  committee.  This  syndicate  procured  the  selection 
of  other  members  of  the  board  of  directors,  notably  F.  L.  Hine,  George  McMurtry,  and 
George  T.  Boggs,  each  of  whom  appears  to  have  acted  and  voted  in  accordance  with 
the  wishes  of  the  members  of  the  syndicate.  One  other  director  stated  that  he  knew 
but  little  of  what  was  being  transacted  in  the  affairs  of  the  railway  company,  and  that 
he  was  a  member  of  so  many  other  boards  of  directors  that  he  had  no  opportunity  to 
examine  into  things  for  himself,  but  had  to  take  the  word  of  those  in  authority.  Thus 
the  syndicate  controlled  the  board  through  the  directorships  held  by  themselves  and 
by  those  subject  to  their  wishes. 

ORGANIZATION   AND   USE    OF   HOLDING   COMPANIES. 

In  July,  1902,  the  syndicate  organized  two  holding  companies,  the  Chicago,  Rock 
Island  &  Pacific  Railroad  Co.  of  Iowa,  and  the  Rock  Island  Co.  of  New  Jersey.  The 
railway  or  operating  company  will  be  referred  to  hereinafter  as  the  railway  company, 
and  the  holding  companies  as  the  Iowa  company  and  the  New  Jersey  company, 
respectively.  The  St.  Louis  &  San  Francisco  Railroad  Co.  will  be  referred  to  as  the 
Frisco. 

The  directors  paid  a  large  sum  to  have  a  suit  suppressed  which 
would  have  exposed  their  illegal  transactions. .  Upon  page  46  occurs 
the  following: 

A  significant  transaction  at  this  time  is  that  growing  out  of  the  action  of  C.  IT.  Venner, 
a  stockholder  of  the  railway  company.  He  made  demands  upon  the  officers  of  the 
railway  company  in  December,  1902.  and  in  January,  1903,  for  a  list  of  its  share- 
holders. Being  ignored,  he  instituted  on  January  31,  1903.  a  proceedins  in  a  State 
court  of  Illinois  to  enjoin  the  organization  of  the  holding  companies  and  the  exchange 
of  railway  company  stock  for  their  securities.  In  February  and  March.  1901,  the 
railway  company  paid  Venner  $291,000,  ostensibly  in  consideration  of  his  delivery 


FEDERAL  OPERATION  OF  TRANSPORTATION  SYSTEMS.     933 

tD  it  of  securities  of  the  New  Jersey  company  and  of  the  railway  company  valued 
at  591,000  and  stock  of  the  Nebreaska  Central  Railway  and  of  the  Nebraska  Con- 
struf'tion  Co.  of  a  nominal  value  of  $200,000.  Thereupon  the  suit  to  restrain  the 
holding;  companies'  plan  was  dismissed.  Neither  the  Nebraska  Central  Railway  Co. 
nor  thp  Nebraska  Co  istru'.'tion  Co.  had  any  road  or  othf>r  taniril>le  assets,  and  their 
stock  is  therefore  considered  to  be  without  value.  The  conclusion  is  obvious  that  the 
payments  to  Venner  were  in  consideration  of  his  refrainincf  from  further  pro.secutin» 
in  the  courts  his  opposition  to  the  syndicate  plans.  The  railway  company  incurred 
in  this  liti'^ation  expenses  amounting  to  about  $17,000. 

Compensation  and  peculations  of  officers  who  defend  salaries  of 
$50,000  to  $75,000  for  themselves,  hut  assign  the  wages  of  clerks, 
telegraph  operators,  conductors,  and  hrakemen  as  the  reason  for  the 
financial  troubles  of  the  road. — On  pages  47-50  is  the  following: 

SALARIES    OP    AND    CONTRIBUTIONS    TO    OFFICERS    AND    DIRECTORS. 

The  salaries  paid  to  some  of  the  principal  officers  at  various  periods  were  as  follows : 

Per  annum, 

H.  U.  Mudge,  president $60,000 

L.  F.  Loree,  cliiirman  executive  committee  (one-half  to  be  paid  by  the  Frisco)     75,  000 

R.  A.  Jackson,  vice  president  and  general  solicitor 50,  000 

R.  R.  Cable,  member  of  board  of  directors 32,000 

W.  B.  T,eeds,  president 32.  000 

B.  L.  Winchell,  president 40,000 

B.  F.  Yoakum,  chairman  executive  committee 30,000 

Daniel  G.  Reid,  chairman  board  of  directors 32,000 

C.  H.  Warren,  first  vice  president 35,000 

W.  G.  Purdy,  upon  his  retirement  from  the  presidency,  was  given  two  years'  salary 
at  ?22,o00  per  annum. 

Mr.  Mudge,  president  of  the  railway  company  and  now  one  of  the  receivers,  asserted 
that  the  troubles  of  the  railway  were  in  a  measure  due  to  increase  of  wages  and  gov- 
ernmental regulations.  When  asked  what  wages  he  referred  to  as  being  increased 
he  pointed  out  the  wages  of  clerks,  telegraph  operators,  conductors,  and  brakemen. 
While  he  regarded  the  wages  of  these  minor  employees  as  having  partially  sapped 
the  financial  strength  of  the  railway,  he  declared  that  the  salaries  paid  to  the  higher 
officers  of  the  company  had  no  appreciable  effect  on  its  expenses. 

1).  G.  Reid,  upon  the  witness  stand,  was  interrogated  and  answered  as  follows: 

"Question.  Mr.  Reid,  do  you  think  these  men  earned  these  high  salaries? 

"Answer.  I  do  not  think  there  is  a  man  who  did  not  earn  more  than  he  was  getting. 

"Question.  In  other  words,  you  defend  paying  these  high  salaries? 

"Answer.  I  defend  nothing.  Here  is  8,000  miles  of  railway;  a  man  who  can  run 
8,000  miles  of  railroad  is  worth  all  he  can  get." 

Many  large  contributions  were  made  to  officers  and  directors  of  the  railway  company. 
George  T.  Boggs,  a  director  and  secretary  to  the  board  of  directors  of  the  railway 
company,  and  also  a  director  in  the  two  holding  companies,  admitted  that  he  served* 
in  these  capacities  merely  as  a  dummy  for  the  syndicate.  On  the  question  of  the 
right  of  the  public  to  have  corporate  funds  of  common  carriers  properly  applied,  he 
testified  as  follows: 

"Question.  Do  you  consider  that  the  directors  of  a  railway  company,  a  public 
service  corporation,  have  the  right  to  do  whatever  they  please  with  the  money -of  the 
railway  company? 

"Answer.  As  in  their  judgment  seemed  right;  yes. 

"Question.  Did  it  ever  occur  to  you  that  the  money  in  the  treasury  of  the  railway 
company  was  the  result  of  taxation  of  the  public  in  passenger  and  freight  tariffs,  and 
that  the  public  had  an  interest  in  the  funds  in  the  treasury? 

"Answer.  1  don't  know  that  I  ever  thought  of  it  particularly. 
.    "Question.  And  that  the  public  had  a  concern  in  the  funds" of  the  railway  company 
not  being  dissipated  in  order  that  they  might  be  applied  to  improvements  and  bet- 
terments and  to  proper  purposes? 

"Answer.  I  never  considered  that  they  were  dissipated. 

"Question.  And  did  il;ever  occur  to  you  that  in  taking  money  from  the  treasury 
of  the  railway  company,  a  public-service  corporation,  an  additional  burden  was 
placed  upon  the  passenger  and  freight  traffic  in  order  to  make  good  the  loss? 

"Answer.  No;  I  never  thought  of  it  in  that  light. 


934  FEDERAL  OPERATION   OF   TRANSPORTATION   SYSTEMS. 

"Question.  You  don't  believe  it  now,  do  you? 

"Answer.  No." 

This  opinion  was  also  expressed  in  effect  by  other  officers  and  directors.  It  appeared 
to  be  the  idea  of  those  in  control  of  the  railway  that  it  was  no  concern  of  the  public 
what  became  of  the  corporate  funds  so  long  as  rates  were  reasonable.  Tliose  stating 
this  opinion  apparently  did  not  take  into  consideration  the  fact  that  if  the  funds 
derived  from  transportation  services  are  expended  wastefully  or  corruptly  the  inevi- 
table result  must  be  either  increased  charges  in  order  to  enable  the  railway  company 
to  obtain  money  to  pay  operating  expenses,  or  bankruptcy. 

Following  are  specific  instances  shown  of  record  of  the  contributions  referred  to: 

J.  E.  Gorman,  first  vice  president  in  charge  of  freight  and  passenger  traffic,  was 
secretly  paid  $18,7.50  per  annum,  making  his  total  compensation  $43,750,  whereas 
the  pay  roll  showed  $25,000. 

C.  A.  Morse,  chief  engineer,  received  a  salary  of  $15,000  per  annum  and  a  secret 
bonus  of  $3,000  on  the  first  of  each  year. 

Upon  the  retirement  of  R.  A.  Jackson  as  general  solicitor  he  was  given  $100,000  in 
cash. 

As  an  inducement  to  L.  F.  Loree,  chairman  of  the  executive  committee,  to  relin- 
iquish,  after  10  months'  service,  a  joint  contract  with  the  railway  company  and  the 
Frisco  under  which  he  was  to  receive  a  salary  of  $75,000  per  annum  for  a  i)eriod  of  five 
yeirs  and  in  addition  was  to  be  paid  a  bonus  of  $500,000  at  the  expiration  of  the  con- 
tract, he  was  given  bonds  of  the  railway  company  of  a  par  value  of  $450,000.  This 
was  borne  equally  by  the  two  companies,  and  the  proportion  of  the  railway  company 
was  charged  to  profit  and  loss.  The  total  amount  borne  by  the  railway  company  in 
this  transaction  exceeded  $250,000. 

C.  II.  Warren,  vice  prcbident,  was  given  by  the  railway  company  $150,000  in  par 
value  of  the  conunon  and  $105,000  in  par  value  of  the  preferred  stock  of  the  New 
Jersey  company  and  $50,000  in  cash.  There  was  no  board  authorization  for  the  latter 
expenditure,  the  item  being  represented  in  the  records  of  the  railway  company 
merely  by  a  voucher  sjiirned  by  D.  G.  Reid. 

R.  R.  Cable,  a  member  of  the  executive  committee,  received  from  the  railway 
company  $30,000  in  bonds  of  the  Iowa  company,  then  worth  $24,500.  for  his  services 
in  the  acquisition  of  the  Burlington,  Cedar  Rapids  &  Northern  Railway  Co.,  and  he 
was  paid  by  the  latter  company  $S5,000  in  the  same  transaction.  Llr.  Cable  also 
received  another  contribution,  which  will  be  referred  to  later. 

Fobert  Malher,  vice  president,  was  given  $25,000  in  cash. 

George  T.  Roggs.  director  and  secretary  of  the  board  of  directors  of  the  railway  com- 
pany, was  given  $15,000  in  cash  when  he  retired  from  the  secretaryship  of  the  railway 
company. 

As  hereinbefore  indicated,  when  the  capital  stock  of  the  railway  company  was 
increased  to  $75,000,000,  shares  of  the  par  value  of  $880,500  were  placed  in  the  name 
of  the  president,  to  be  thereafter  distributed  in  accordance  with  the  following  reso- 
lution of  the  executive  committee  passed  at  a  meeting  held  in  New  York  July  1,  1902: 

**  Resolved.  That  such  portion  as  the  president  may  determine  of  the  shares  of  the 
increased  capital  stock  of  the  company  not  required  for  the  purpose  of  Ihe  foreeoin? 
resolutions  shall  he  disposed  of  at  par  by  the  president  for  the  benefit  of  such  officers 
.of  the  company  as  the  j>resident  shall  elect  and  determine." 

This  stock  was  later  exchanged  for  securities  of  the  Iowa  and  New  Jersey  companies 
in  the  same  manner  as  was  stock  of  the  stockholders  of  the  railway  company. 

Following  this  exchan'jre  P.  R.  Cable  received  securities  of  a  market  value  of 
$308,300  for  which  he  ])aid  $200,000. 

H.  A.  Parker,  first  vice  president,  received  securities  then  worth  $27,900  for  which 
he  paid  but  $15,000. 

Fobert  Mather  received  securities  of  a  market  value  of  $145,912  above  his  payments 
therefor. 

The  contributions  to  officials  of  the  railway  company  in  excess  of  their  salaries 
aggregated  about  a  million  dollars. 

•     IRREGULAR  VOUCHER  PAYMENTS. 

Unexplained  vouchers  for  amounts  aggregating  $72,523.45  were  disbursed  to  the 
officers  of  the  railway  company  for  purposes  not  clearly  defined.  One  such  voucher 
for  $6  823.12  was  drawn  apparently  to  reimburse  W.  H.  Moore  for  losses  sustained  by 
him  in  "supporting  the  market  while  bonds  of  the  railway  company  were  being 
Bold."  The  voucher  was  certified  by  D.  G.  Reid.  "for  the  benefit  of  the  railway 
company."  No  papers  were  attached  to  the  voucher  and  no  other  information  was 
available  with  respect  to  the  disbursement. 


FEDERAL  OPEBATION   OF   TRANSPOBTATION   SYSTEMS.  935 

Another  voucher  in  favor  of  the  Liberty  National  Bank  of  New  York  City,  in  ex- 
hange  for  a  cashier's  check  issued  to  Robert  Mather  for  $25  000.  is  charQ;ed  to  "general 
expenses"  under  "operating  expenses."  This  voucher  refers  to  a  miscellaneous  file 
shown  by  the  index  thereto  to  have  comprehended  "contributions  to  campaign 
committee."  The  file,  however,  was  not  produced  and  a  diligent  effort  on  the  part 
of  the  accountants  to  secure  it  was  unavailing.  Without  this  file  it  is  impossible  to 
state  the  purpose  for  which  the  money  was  expended,  but  the  generalization  "con- 
tributions to  campaign  committee."  in  the  light  of  the  practices  Indulged  in  by  the 
syndicate  in  question,  is  clearly  suggestive. 

The  books  of  the  railway  company  reveal  payments  aggregating  $44  066.05  to  the 
Denver  Post.  The  vouchers  attached  read,  "for  advertising  in  editorial  and  news 
columns."  Other  entries  show  that  three  of  these  vouchers,  aggregating  $20  000, 
cover  a  refund  that  this  newspaper  received  at  the  rate  of  25  cents  per  hundred  on 
its  freight  carried  over  the  lines  of  the  railway  company  from  points  in  Wisconsin. 

Another  voucher  is  for  $50,000  to  S.  M.  Felton  for  the  railway's  proportion  of  amount 
"paid  by  E.  H.  Harriman  and  his  associates  for  money  expended  by  them  to  secure 
the  discontinuance  of  a  line  of  toad  being  constructed  in  1900  between  Peoria.  111., 
and  Clinton.  Iowa,  as  per  agreement  between  R.  R.  Cable,  chairman  of  the  board, 
and  E.  H.  Harriman." 

AGGREGATE   OP  LOSSES. 

The  aggregate  losses  sustained  by  the  railway  company  in  connection  with  the 
foregoing  transactions  may  be  summarized  as  follows: 

Expenses  of  maintaining  and  housing  holding  companies,  more  than . . .     $290,  000. 00 

Frisco  deal,  approximat  ly 6,  500, 000.  00 

Alton  deal,  approximately 6,  370,  000.  00 

Trinity  &  Brazos  Valley  Ry.  deal,  more  than 4,  500,  OCO.  00 

Consolidated  Indiana  and  Bering  Coal  Cos..  at  least 1,  SOO,  000.  00 

Contributions  or  gratuities  to  officers  and  directors,  about 1,  000, 000.  CO 

Venner  transaction 21 7,  000. 00 

Miscellaneous  and  unexplained  expenditures. 72.  523.  45 

These  items  show  an  aggregate  loss  to  the  railway  company  of  more  than  $20,000,000. 
In  addition  thereto  it  is  to  be  noted  that  prior  to  June  30,  1914,  the  railway  company 
paid  to  financial  institutions,  in  connection  with  the  issuance  of  bonds,  commissions 
aggregating  more  than  $1,600,000  and  suffered  discounts  of  more  than  $17,700,000. 

INDIVIDUAL    PROFITS    OP    PROMOTERS,    OFFICERS,    AND    DIRECTORS    OP    THE    HOLDING 

COMPANIES. 

The  amount  of  gains  accruing  to  W.  B.  Leeds,  D.  G.  Reid,  W.  H.  Moore,  and  J.  H. 
Moore  through  their  control  and  manipulation  of  the  railway  company  are  probably 
not  ascertainable.  Reid.  when  interrogatod  with  a  view  to  ascertaining  his  profits 
from  the  various  transactions,  explained  that  he  always  burned  his  books  at  the  end 
of  each  month. 

The  quotations  placed  in  the  record  from  the  stock  market  of  the  New  Jersey  com- 

Eany  stock  and  the  railway  company  stock  showed  wide  fluctuations.     W  hatever  have 
een  the  gains  realized  by  these  persons,  it  is  certain  that  the  present  holders  of  the 
stocks  and  bonds  of  the  holding  companies  have  that  which  is  of  little  or  no  value. 

REPORTS  TO   STOCKHOLDERS, 

Misrepresentation  of  assets  in  reports  to  stockholders  appears  to  have  been  a  prac- 
tice of  the  directors  of  the  railway  company.  On  June  30,  1904,  a  book  surplus  was 
claimed  for  the  railway  company  of  $22,343,955.26.  By  June  30,  1914.  the  company 
conceded  a  reduction  of  this  surplus  to  $6,199,841.08,  and  even  this  amount  was 

fictitious. 

******* 

The  directors  also  reported  as  assets  the  5  per  cent  debenture  bonds  of  the  Iowa 
company,  which  were  in  fact  worthless,  but  which  were  reported  as  worth  nearly 
16,000,000. 

In  view  of  the  fact  that  the  reported  value  of  the  "securities"  listed  for  the  year 
1914  was  nearly  $18,000,000  in  excess  of  their  actual  value,  instead  of  a  surplus  of 
more  than  $6,000,000,  claimed  by  the  railway  company,  there  should  have  been  shown 
a  deficit  of  over  $11,600,000, 

Another  misleading  and  objectionable  practice  of  the  railway  company  oflBcials  was 
the  failure  to  state  on  the  pay  roll  the  true  amounts  paid  to  its  oQlceTB, 


936  FEDEBAL  OPERATION   OP   TRANSPORTATION   SYSTEMS. 

The  publication  of  misleading  reports  to  stockholders  can  not  be  too  severely  con- 
dennsd,  and  the  individuals  guilty  of  such  acts  should  be  subject  to  adequate 
penalties. 

The  bankrupting  of  railwaj^s  in  the  United  States  has  invariably 
occurred  from  maladministration  and  speculation  on  the  part  of  the 
officers  in  charge,  and  never  because  of  insufficient  revenues  when 
wisely  and  honestly  administered.  Receiverships  have  always  re- 
sulted from  the  above  cause  or  else  have  been  planned  by  directors 
for  their  own  private  gain.  In  some  cases  the  condition  of  the 
companies  did  not  warrant  receiverships,  even  though  the  directors 
had  placed  their  companies  in  an  embarrassing  condition.  The 
receivership  of  the  Rock  Island  system  is  an  example  of  the  cause 
last  nientioned,  and  was  planned  without  the  knowledge  of  the 
majority  of  the  board  by  a  conspiracy  of  a  few  directors  in  which 
they  were  joined  by  the  chief  counsel  of  the  company,  who  afterwards 
acted  as  receiver  m  their  interest.  "Fake"  legarproceedings  were 
had  through  attorneys  employed  fraudulently  to  prevent  the  stock- 
holders defending  their  rights. 

The  following  is  taken  from  the  official  report: 

RECEIVERSHIP. 

The  syndicate  decided  to  put  the  railway  into  a  receivership.  The  general  counsel 
of  the  railway  company  at  the  suggestion  of  W.  II.  Moore,  a  member  of  the  syndicate, 
drew  the  bill  asking  for  a  receivership  and  engaged  an  attorney  ostensibly  to  represent 
the  other  side.  The  bill  was  placed  in  the  hands  of  this  attorney  with  the  name  of  the 
complainant  omitted  and  he  was  instructed  by  the  general  counsel  to  locate  some 
creditor  of  the  railway  company  willing  to  act  as  complainant.  There  was  an  agree- 
ment between  the  general  counsel  and  this  attorney  as  to  the  parties  the  latter  would 
recommend  to  the  court  as  receivers,  the  general  counsel  agreeing  to  instruct  the 
attorney  appearing  for  the  railway  company  to  acquiesce  in  the  recommendations  so 
made. 

The  board  of  directors  of  the  railway  company  was  not  informed  of  the  intention  to 
file  a  bill  for  receivership  and  at  no  meeting  of  the  board  was  any  authority  ever 
given  for  such  action.  Members  of  the  board  of  directors  not  in  the  confidence  of  the 
syndicate  were  kept  in  ignorance  of  the  fact  that  such  a  bill  had  been  prepared.  The 
stockholders  had  no  information  of  the  purpose  to  put  the  railway  company  into  a 
receivership,  although  a  stockholders'  meeting  was  held  after  the  date  upon  which 
the  receivership  bill  was  completed  by  the  general  counsel,  and  this  general  counsel 
attended  the  meeting.  According  to  the  testimony,  the  Bill  was  completed  by  the 
general  counsel  March  29,  1915,  and  the  fact  that  it' was  to  be  filed  whenever  desired 
by  those  in  authority  was  known  only  to  certain  insiders.  The  testimony  clearly 
establishes  the  fact  that  the  railway  company  could  easily  have  paid  the  debt  of 
$16,000  upon  which  the  receivership  application  was  based,  and  that  arrangements 
probably  could  have  been  made  to  meet  all  pressing  obligations  of  the  railway 
company. 

The  creditor  at  whose  instance  the  receivership  application  was  filed  appeared  as 
complainant  by  request.  R.  P.  Lamont,  the  president  of  the  American  Steel  Foun- 
dries, the  complainant,  testified  that  he  would  not  have  thought  of  bringing  such  a 
proceeding  against  the  railway  company  unless  he  had  understood  that  it  would  be 
regarded  as  not  unfriendly  but  as  a  friendly  act  to  oblige  the  railway  company.  He 
only  consented  that  his  company  should  appear  as  complainant  when  he  was  assured 
that  this  course  was  in  accordance  with  the  wishes  of  the  railway  company  and  that 
his  company  was  not  to  have  any  care  or  expense  in  the  preparation  of  papers  or  pay- 
ment of  counsel  fees.  The  suit  was  not  a  bona  fide  proceeding  to  collect  a  debt,  but 
was  instituted  to  carry  out  the  purposes  and  schemes  of  the  syndicate  controlling  the 
r-iilway. 

N,  L,  Amster,  who  was  elected  to  the  board  of  directors  of  the  railway  companv  by 
the  minority  stockholders  at  the  stockholders'  meeting  held  in  Chicago,  April  12, 
1915,  believing,  according  to  his  testimony,  that  no  sincere  effort  was  being  made  by 
other  members  of  the  board  to  finance  the  obligations  of  the  railway,  undertook  to 
assist  in  raising  about  $6,000,000  needed  by  the  railway  to  meet  obligations  soon 
thereafter  to  mature.    On  April  16,  1915,  he  met  and  conferred  with  Messrs.  James, 


FEDERAL  OPEBATION   OF   TKANSPORTATION   SYSTEMS.  937 

McLean,  and  Schumacher,  all  directors  of  the  railway  and  members  of  the  executive 
committee,  and  discussed  the  company's  finances.  These  three  expressed  approval 
of  his  purpose  to  negotiate  for  the  money.  Amster  testified  that  he  Lad  secured  as- 
surances for  the  furnishing  of  the  money  from  responsible  Boston  bankers  on  securities 
which  the  railway  company  had.  When  he  arrived  in  New  York  on  the  morning  of 
April  20  to  report  this  fact  he  went  to  the  office  of  the  railway  company,  and,  quoting 
his  testimony,  "could  not  find  anybody  there  that  would  say  anything,  except  a  lot  of 
people  moving  back  and  forth.  I  left  the  office  and  found  on  the  ticker  that  the 
Rock  Island  had  been  put  in  the  hands  of  a  receiver."  This,  Amster  testified,  was 
the  first  information  he  had  of  the  receivership  or  that  such  a  step  was  in  prepara- 
tion, yet  he  was  a  director  of  the  road  and  after  the  stockholders'  meeting  in  Chicago, 
April  12,  traveled  from  Chicago  to  New  York  with  Roberts  Walker,  the  general  coun- 
sel of  the  railway  company. 

It  will  be  remembered  that  the  bill  was  completed  by  the  general 
counsel  on  March  29,  this  fact  being  known  onl}^  to  a  special  few. 

The  bill  was  filed  April  20.  The  records  of  the  New  York  stock  market  reveal  that 
the  railway  stock  was  inactive  until  the  day  this  bill  was  completed,  March  29.  Then 
the  stock  b^gan  to  be  largely  dealt  in,  and  the  price  increased  from  $20  to  $39  a  share. 
When  the  bill  was  filed  and  receivers  were  appointed  the  stock  dropped  from  $39  to 
$20  a  share. 

1 1  is  a  forceful  commentary  on  the  methods  by  which  a  great  railway  may  be  ma- 
nipulated into  a  receivership,  when  it  is  noted  that  the  general  couns3l,  after  drawing 
the  bill  for  a  rec3iver3hip,  sold  his  stock,  and  the  local  couns?),  who  reprrs^nted  the 
railway  company  ii  th?  r^cnvership  proceediigs  owned  no  stock  in  the  railway  com- 
pany, and  that  none  of  thos3  directly  participiting  in  the  receivership  proceedings 
had  any  financial  interest  in  the  railway  companv.  The  real  owners  of  the  railway, 
the  stockholders,  the  S3curity  holders,  and  the  directors,  except  th^se  composing  the 
svndicate  and  in  its  confidence,  were  in  ignorance  of  the  receivership  application. 
Mr,  Mudge,  former  president  of  the  railway  company,  is  one  of  the  receivers. 

The  g3neral  counsal  for  the  railway  companv,  who  planned  the  receivership  in 
obedience  to  the  will  of  the  syndicate,  is  now  counsel  for  the  receivers. 

SUMMARY    AND   CONCLUSION. 

This  review,  giving  a  brief  glance  at  the  wild  speculations,  frauds, 
and  conspiracies  of  the  officials  to  plunder  and  wreck  the  properties 
intrusted  to  their  care  and  place  heavy  burdens  upon  both  the 
stockholders  and  public,  needs  no  further  commentary  than  the 
closing  words  of  the  Interstate  Commerce  Commission  in  its  report: 

The  property  of  t'le  railway  company  will  be  called  upon  for  many  years  to  make 
up  the  drain  upon  its  resources  resulting  from  transactions  outside  tl  e  proper  sphere 
in  which  stockholders  had  a  right  to  suppose  their  moneys  were  invested.  This 
record  emphasizes  the  need  of  railway  directors  who  uctually  direct.  There  are  too 
many  passive  directors  who  acquiesce  in  what  is  being  done  without  knowledge  and 
without  investigation.  A  director  of  a  railroad  is  a  quasi  public  ofFcial  who  occupies 
a  position  of  tiust.  A  director  who  submits  blindly  to  the  exploitation  of  his  com- 
pany is  a  paity  to  its  undoing  and  lie  should  be  held  responsible  to  tl  e  same  extent 
as  it  he  had  been  a  principal  instead  of  an  accessory  before  the  fact.  The  greater  his 
prominence  the  greater  his  responsibility  and  the  greater  his  dereliction.  Obviously 
a  man  of  large  affairs  could  not  attend  to  all  the  details  in  intricate  transactions,  but 
it  is  inconceivable  that  a  director  of  ordinary  business  prudence  and  sagacity  would 
sanction  large  expenditures  without  an  inquiry  as  to  the  purposes  of  such  disburse- 
ments. So  long  as  this  situation  exists,  however,  it  suggests  the  need  of  a  law  to 
charge  such  directors  with  individual  responsibility  for  tne  dissipation  of  corporate 
funds. 

The  Clayton  Antitrust  Act,  which  becomes  effective  October  15,  1916,  will  make  it 
unlawful  for  any  parson  at  the  same  time  to  be  a  director  in  two  or  more  competing 
corporations,  anv  one  of  which  has  a  capital,  surplus,  or  undivided  profits  aggregating 
more  than  $1,000,000,  but  common  carriers  are  expressly  exempted  from  its  applica- 
tion. It  should  be  just  as  grave  an  offense  for  an  official  of  a  railway  to  be  faithless  to 
his  trust  for  financial  sriin  as  it  is  for  an  elected  official  of  the  Government  to  betray  his 
trust  for  money  reward. 


938  FEDERAL   OPERATION   OP   TRANSPORTATION   SYSTEMS. 

THE   LOUISVILLE    &   NASHVILLE   RAILWAY   SYSTEM. 

This  railway  system  was  investigated  by  the  Interstate  Commerce 
Commission.  The  results  of  its  investij^ation  are  to  be  found  in  the 
official  report  of  the  commission  No.  6319,  dated  February  16,  1915, 
entitled:  /'In  re  Financial  Relations,  Rates,  and  Practices  of  the 
Louisville  &  Nashville  Railroad  Co.,  the  Nashville,  Chattanooga  & 
St.  Louis  Railway,  and  other  Carriers." 

This  investi^ration  was  the  result  of  a  resolution  of  the  United  States 
Senate,  prompted  by  complaints  of  the  public  respecting  illegal  acts 
of  the  above  company  and  its  subsidiaries,  in  which  it  requested  the 
Interstate  Commerce  Commission  to  inquire  into  the  financial  afi^airs 
and  capitalization  of  the  company,  its  practices,  and  its  efforts  to 
illecrally  influence  or  control  politics,  legislation,  and  pubhc  opinion. 

^Pecause  of  the  fact  that  some  of  the  records  and  accounts  of  the 
company  had  been  burned  by  them  and  the  further  fact  that  the 
commission  was  permitted  by  the  company  to  inspact  but  part  of 
those  which  remained,  and  the  further  ifact  that  the  officials  of  the 
road  and  other  witnesses  summoned  to  app3ar  bsfore  the  commission 
refused  to  testify,  the  commission  was  unable  to  ascertain  but  part 
of  the  facts.  The  testimony  obtained  was,  however,  sufficient  to 
incriminate  the  company  in  many  unlawful  acts,  among  the  ipost 
important  of  which  were  the  violation  of  laws,  both  Federal  and 
State,  in  respect  to  monopolies;  the  use  of  the  stockholders'  money 
to  control  legislation,  politics,  and  the  press;  and  the  deceptive  man- 
ner in  which  the  accounts  were  kept  respecting  the  capital  investment 
and  the  operating  expenses. 

An  added  romantic  interest  attaches  to  this  report  since  it  includes 
correspondence  between  two  railroad  presidents,  who  proudly  styled 
themselves  "Pizarro"  and  ''Cortez,"  joyfully  imaginmg  they  have 
"subjected  the  natives"  and  can  now  divide  the  Western  Hemisphere 
between  them. 

On  account  of  the  refusal  of  certain  officials  to  testify  before  the 
commission  regarding  their  acts,  an  appeal  was  made  to  the  Supreme 
Court  of  the  United  States,  which  court,  in  December,  1917,  issued 
a  mandamus  directing  these  witnesses  to  appear  before  the  commissioa 
and  testify.  When  this  additional  evidence  is  taken,  the  result  will 
be  to  make  the  investigation  of  added  interest. 

As  the  stories  of  all  the  railwa}^  systems  investigated  by  the  com- 
mission are  nearly  identical  and  include  practically  all  of  the  same 
illegal  acts,  we  will,  for  lack  of  space,  record  only  some  of  the  prin- 
cipal features  brought  out  in  this  case. 

The  following  brief  extracts  from  the  commission's  report,  out- 
lining the  history  of  the  road,  its  accounting  as  to  capitalization, 
operating  expenses,  etc.,  appear  in  pages  168-173: 

METHOD   OF  THE   INVESTIGATION. 

On  November  10, 1913,  immediately  following  the  adoption  of  the  Senate  resolution 
above  referred  to,  the  commission  ordered  an  investigation  into  the  questions  pre- 
sented and  served  formal  notice  of  this  investigation  upon  the  carriers  concerned. 
Thereafter  examiners  of  the  commission  were  directed  to  examine  the  accounts, 
records,  and  memoranda  of  the  Louisville  &  Nashville  Railroad  Co.  and  the  Nashville, 
Chattanooga  &  St.  Louis  Railway  with  a  view  to  securing  all  information  in  the  files 
of  these  carriers  that  would  throw  light  upon  the  questions  contained  in  the  Senate 
resolution,    ^'ertain  obstructions  have  been  placed  in  the  way  of  the  commission's 


FEDEKAL  OPERATION  OP  TBANSPOBTATION   SYSTEMS.  939 

examiners  by  the  carriers,  and  these  will  be  referred  to  later.  The  facts  stated  herein 
were  secured  from  the  annual  and  statistical  reports  and  the  contracts  and  tariffs  on 
file  with  the  commission,  from  such  of  the  carriers'  records  and  accounts  as  were  volun- 
tarily submitted  by  them;  from  testimony  given  at  formal  hearings  in  other  cases 
before  the  commission;  and  in  a  few  cases,  that  will  be  indicated,  from  interviews  by 
the  commission's  examiners  with  railroad  officials  and  other  persons.  The  questions 
presented  by  the  resolution  will  be  stated  and  answered  in  numerical  order,  accom- 
panied by  such  comment  as  seems  necessary.  Following  the  report  will  be  found  an 
appendix  illustrating  and  supplementing  certain  of  the  answers. 

INTEREST    OP    THE    LOUISVILLE     &    NASHVILLE     RAILROAD    CO.    IN    OTHER    RAILROADS, 

The  Louisville  &  Nashville  Railroad  Co.  was  incorporated  in  Kentucky  in  1850, 
The  line  from  Louisville  to  Nashville,  185.81  miles  iri  length,  was  completed  ai  d 
placed  in  operation  in  1859,  forming  the  nucleus  of  the  present  system.  Various  ex- 
tensions have  since  been  constructed  aggregating  399.56  miles,  and  making  a  total  of 
585.37  miles  constructed  by  the  company  under  its  own  charter.  The  annual  report 
of  this  carrier  to  its  stockholders  of  the  year  ended  June  30,  1913,  shows  that  it  owned 
or  controlled  on  that  date  7,889.77  miles  of  road.  A  comparison  of  the  miles  of  road 
constructed  by  this  company  under  its  own  charter  with  the  total  miles  of  road  owned 
or  controlled  by  it  well  illustrates  its  activity  in  securing  control  of  other  railroads. 

The  several  lines  acquired  by  the  Louisville  &  Nashville  through  purchase,  lea.se, 
control,  or  otherwise,  together  with  the  dates  of  acquisition  and  the  length  of  each,  are 
listed  under  appropriate  captions  in  Appendix  A  to  this  report. 

COST   OP   ROAD. 

Before  the  Louisville  &  Nashville  advised  the  commission  that  such  of  its  records 
as  were  made  prior  to  August  28,  190G,  would  not  be  submitted  for  inspection, 
schedules  of  most  of  the  cost  of  road  accounts  had  been  drawn  from  the  ledgers  prepara- 
tory to  completing  the  analysis  of  the  accounts  from  information  to  be  secured  from 
the  journals  and  other  records  of  original  entry.  While  a  complete  analysis  of  these 
accounts  was  prevented  by  the  Louisville  &  Nashville  the  preliminary  analysis  was 
sufficient  to  indicate  that  the  cost  of  road  account  is  heavily  burdened  ^^ith  charges 
which  do  not  represent  actual  construction  cost.  From  such  incomplete  information 
it  is  concluded  that  at  least  $16,000,000  shown  in  the  cost  of  road  accounts  covers 
items  which  should  not  be  charged  as  a  part  of  the  cost  of  this  carrier's  road,  as  follows: 

Charges  included  in  cost  of  road  accounts  but  not  expended  for  actual  construction. 

Discount  on  stock $1, 440.  018.  00 

Other  expen.ses  in  connection  with  the  sale  of  stock 82,671.48 

Discount  on  bonds 2, 192, 142.  57 

Other  expenses  in  connection  with  the  sale  of  bonds 8, 537.  95 

Interest  and  dividends 1,  917, 535. 13 

Amounts  credited  to  profit  and  loss: 

For  reasons  not  stated $2,  640,  000.  00 

To  provide  a  surplus  in  order  that  a  stock  dividend 

of  100  per  cent  might  be  paid 6,  300,  000.  00 

To  raise  book  value  of  stock  above  the  actual  cost 

of  acquirement 1, 422,  784.  00 

To  adjust  difference  between  advances  made  for 
construction  and  par  value  of  bonds  received  in 

settlement  therefor 78, 447.  72 

10, 441,  231.  72 

16,  032, 1'^.fi.  85 

The  above  statement  is  illustrative  of  the  character  of  charges  which  the  carrier 
has  included  in  its  cost  of  road  account.  A  full  examination  of  the  carrier's  accounts 
might  disclose  conditions  under  which  some  of  the  above  amounts  could  properly  be 
charged  to  cost  of  road  account,  but  it  is  also  possible  tliat  other  improper  items 
would  be  found  which  would  greatly  augment  the  amount  shown. 

StocJc  and  dividends  of  100  to  200  per  cent  declared  and  excessive 
charges  made  to  property  account. — The  extracts  referring  to  the 
above  subjects  are  taken  from  pages  171-173  of  the  commission's 
report. 


940  FEDERAL   OPERATION    OF   TRANSPORTATION    SYSTEMS. 

STOCK    DIVIDENDS    DECLARED. 

A3  shown  in  th?  above  table,  a  stock  dividend  of  100  p3r  cent  was  declared  by  the 
Loiisville  <fe  Nashville  on  October  6,  1880.  According?  to  a  corporate  history  of  this 
railroad,  which  was  found  in  its  office,  10  stock  dividends  were  declared  by  this 
company  between  1880  and  1891. 

*  *  *  ■»  it  *  * 

To  make  pi33ible  the  stock  dividend  of  100  p3r  cent  declared  on  October  6,  1880, 
the  aiionnt  of  sirplus  wa?  arbitrarily  increased  by  rai^ins^  the  book  value  of  certain 
a^33ts.  FriTi  th3  corpiratg  history  above  r3ferr9d  to  it  app3ar3  that  when  this  divi- 
d^nl  was  declared  the  book  value  of  the  carrier's  proparty  exceeded  its  capital  stock 
liability. 

******* 

To  meet  this  situation  the  assets  of  the  company  were  revalued,  and  the  board  of 
directors  voted  that  the  book  value  of  certain  assets  should  be  increased.  Accord- 
iuG^ly  entries  were  made  on  the  books  of  the  company  creditinp;  the  profit  and  loss 
account  and  corre^pondino^ly  increasing  the  book  value  of  the  following  assets  in  the 
amounts  shown  below  to  $7,212,226. 

The  above-mentioned  entries  brought  the  profit  and  loss  account  to  110,883,609,  to 
which  was  charged  the  100  p3r  cent  dividend  of  $9,005,000. 

The  above  facts  illustrate  the  manner  in  which  p3rmanent  improvements  on  the 
Louisville  &  Nashville  have  in  the  pist  to  a  large  extent  been  made  out  of  earnings 
and  subsequent! V  charged  to  the  capital  account.  As  the  commission  in  its  annual 
reports  has  previously  pointed  out,  only  by  the  fullest  publicity  and  public  sujoer- 
vision  of  stock  and  bond  issues  may  such  increasing  of  the  capital  accounts  of  carriers 
at  the  expense  of  the  public  be  prevented. 

EXCESSIVE   CHARGES   TO   PROPERTY   ACCOUNT. 

The  issued  capital  stock  of  this  carrier  amounts  to  $16,000,000,  par  value,  of  which 
$15,^84,787.50,  par  value,  is  outstanding.  It  appears  that  cash  aggregating  only 
about  $9,831,840.77  was  received  for  this  stock,  while  an  amount  exceeding 
$8,107,398.50  was  given  to  stockholders  in  the  form  of  stock  dividends  and  by  the 
sale  of  stock  at  prices  below  par  and  also  below  market  value.  Included  in  this 
amount  is  a  stock  dividend  of  200  per  cent  on  the  outstanding  capital,  which  was 
authorized  by  the  board  of  directors  on  August  10,  1873.  The  dividend  as  origina'ly 
declared  amounted  to  $4,324,032.98,  which  was  charged  to  the  carrier's  property 
investment  account  on  July  31,  1873,  as  an  offset  to  the  carrier's  liability  for  stock 
issued  from  which  no  funds  were  derived.  Later  the  dividend  was  increased 
$251,671.79,  which  amount,  however,  was  not  charged  to  property  investment  but 
to  profit  and  loss.  Of  this  amount  $181,537.88  was  recorded  in  the  books  by  an  entry 
dated  June  39,  1875,  and  represented  the  dividends  of  200  per  cent  on  $91,201.44  of 
capital  stock  held  in  the  treasury. 

How  the  directors  spent  l^rge  sums  of  the  stockholders^  money  to 
control  the  press,  politics,  and  legislation  and  to  influence  public  senti- 
ment, for  which  purpose  they  formed  the  ''  Tennessee  Railroad  Associa- 
tion"; other  ''falce''  organizations  for  the  same  purpose  were  formed. — 
The  foUowing  extracts  are  from  pages  229  to  233  of  the  report: 

EXPENSES  FOR  THE  PURPOSE  OF  MAINTAINING  POLITICAL  AND  LEGISLATIVE  AGENTS 

Expenditures  by  the  Louisville  &  Nashville  during  this  period  which  appear  to 
have  been  for  the  purpose  of  maintaining  political  and  legislative  agents  amounted 
to  $23,274.41.     This  amount  was  distributed  as  follows: 

Expenditures  for  securing  copies  of  and  information  concerning  legislative 

bills  (>l  particular  interest  to  the  Louisville  &  Nashville $1,  413.  58 

Expenditures  directly  assignable  to  specific  le^^islation 5,  596.  60 

Contri].utii)ns  to  various  committees  or  associations  for  the  purpose  of 
influencing  legislation 6,  611.  29 

Expenditures  on  account  of  legislative  agents  in  general 9,  652.  94 

FOR    THE    PURPOSE    OF    INFLUENCING    PUBLIC    SENTIMENT. 

The  accounts  of  the  Louisville  &  Nashville  disclose  that  between  September  1, 
1906,  and  July  1,  1914,  this  carrier  expended  at  least  $39,322.48  for  the  purpose  of 
creating:  public  sentiment  in  favor  of  its  plans. 

Of  this  amount,  over  $53,000  was  spent  in  a  publicity  campaign  in  Alabama  in  the 
endeavor  to  mold  public  opinion  through  the  medium  of  the  press.     Part  of  the 


FEDERAL  OPEEATION  OF  TRANSPORIATION  SYSTEMS.     941 

balance  was  contributed  by  the  Louisville  &  xVashville  to  a  fund  made  up  by  numerous 
carriers  to  finance  a  campaign  in  Louisiana  to  prevent  the  change  of  tax  laws.  In 
order  that  the  railroads  concerned  might  preserve  an  outward  appearance  of  indif- 
ference in  regard  to  the  legislation  in  question,  the  contributions  for  this  purpose 
were  placed  in  the  hands  of  a  bank  to  be  disbursed  by  it  as  if  in  furtherance  of  bank- 
ing interests.  If  the  commission's  examiners  had  been  accorded  access  to  the  corre- 
spondence files  of  this  carrier  and  to  its  accounts  prior  to  1906,  there  seems  no  doubt 
that  information  as  to  other  substantial  expenditures  for  the  purposes  referred  to  in 
the  question  would  have  been  secured. 

TEN'NESSEE    RAILROAD    ASSOCIATION. 

The  Louisville  &  Nashville  was  one  of  the  railroads  which  about  1884,  for  the  pur- 
pose of  combating  adverse  legislation  in  Tennessee,  formed  the  Tennessee  Railroad 
Association. 

A  large  number  of  vouchers,  aggregating,  between  September  1,  1906,  and  July  1, 
1914,  approximately  $295,000,  were  issued  by  this  carrier  to  various  persons,  as  to 
which  the  accounts  contained  no  information  other  than  that  the  expenditures  were 
for  "special"  services  and  expenses.  Although  a  number  of  these  vouchers  bore 
the  notation  "as  per  statement  on  file  in  the  general  manager's  office,"  a  request  that 
such  files  be  submitted  for  inspection  was  denied. 

Numerous  other  vouchers  issued  between  September.  1906.  and  July,  1911.  and 
aggregating  $67  722.30.  are  recorded  as  having  been  issued  under  the  direction  of  the 
legal  or  executive  departments  without  the  purpose  being  stated.  These  were  for 
amounts  in  excess  of  $1  000 — one  such  voucher,  made  in  February.  1910,  is  for 
$20  715.06.  Whether  such  sums  were  spent  for  the  purposes  referred  to  in  the  question 
can  not  be  determined. 

The  character  of  some  of  the  special  ledger  accounts  recording  large  expenditures, 
the  purpose  of  which  could  not  be  learned  Ifrom  the  accounts  is  outlined  below: 

An  account  was  opened  in  the  name  of  the  Immigration  &  Industrial  Association 
of  Alabama  in  January.  1907.  This  records  cash  advanced  to  George  W.  Jones, 
assistant  district  attorney  at  Montgomery,  Ala.,  made  under  the  authority  of  the  first 
vice  president;  $13  068.80  was  charged  to  this  account;  $7,808.86  was  re-collected 
from  other  carriers  who  were  parties  to  the  association  and  credited  to  this  account. 
The  balance  of  $5  199.94  remaining  was  charged  to  operating  expenses  by  authority 
of  the  first  vice  president.  The  nature  of  this  account  is  indicated  by  notations  on 
the  treasurers  statements  of  cash  receipts  entered  therein,  such  as  "proportion  of 
expenses  account  adjourned  session  of  Alabama  Legislature." 

The  above  are  illustrative  of  numerous  suspense  accounts  opened  prior  to  1913  in 
which  the  entries  were  of  such  a  vague  character  as  not  to  disclose  the  purposes  for  which 
they  were  kept.  Under  the  accounting  rules  prescribed  by  the  commission  the  keeping 
of  such  vague  accounts  at  the  present  time  would  subject  the  carriers  to  prosecution  . 

In  the  testimony  taken  during  these  investigations  bj  the  com- 
mission, which  is  printed  in  a  volume  of  519  closely  prmted  pages 
(S.Doc.  No.  461, 64th  Cong.,  1st  sess.,  1916),  over  150  pages  of  testimony 
appear  in  reference  to  the  bribing  of  legislators,  chiefly  through 
passes,  which  aggregated  over  7,000,000  miles  of  free  transportation. 
These  passes  were  accepted  by  governors  and  in  many  cases  by 
judges,  as  well  as  by  more  than  90  per  cent  of  the  members  of  the 
legislatures  of  the  various  States  through  which  the  lines  passed. 
That  these  passes  were  understood  by  the  legislators  as  bribes  is 
clearly  shown  in  letters  where  they  promise  the  railway  officials  to 
''give  them  whatever  they  wanted"  m  return  for  the  passes.  An 
interesting  letter  is  one  introduced  in  the  evidence,  in  which  the 
writer  addresses  the  railway  official  as  "Dear  Bribe  Giver:" 

[J.  A.  Clement,  lawyer,  suite  11-12  Baker  Building.] 

Dickson,  Tenn.,  October  7,  1915. 
Mr.  D.  G.  Hudson, 

Nashville,  Tenn. 
Dear  Btube  Giver:  You  promised  me  Saturday  you  would  send  pass  for  Mr.  C. 
from  Dickson  to  Nashville  and  return,  Monday,  but  you  overlooked  yoiu-  hand  again. 
Luke  must  have  you  thinking.     Please  send  it  by  the  2.15  train  to-morrow,  if  possible. 

Yours  truly,  J.  A.  Clement. 


942  FEDERAL  OPEKATION  OP  TRANSPORTATION  SYSTEMS. 

Division  of  tioo  continents. — Having  subjugated  the  American  citi- 
zens, as  they  thought,  as  did  Cortes  and  Pizarro  of  old,  two  railroad 
Presidents  proposed  to  divide  the  Western  Hemisphere  between  them. 
Dme  of  the  most  interesting  testimony,  bordering  upon  the  romantic 
days  when  Pizarro  and  -Cortes  subjugated  the  natives  of  tlie  Western 
Hemisphere  about  four  centuries  ago,  is  to  be  found  in  the  testimony 
of  two  railroad  presidents  who  having,  as  they  thought,  secured'  the 
subjection  of  the  present  American  people  as  did  those  plunderers  of 
old,  felt  the  time  had  arrived  when  they  couLl  enjoy  the  realization 
of  their  further  dreams  of  conquest  and  accordingly,  under  the  names 
of  "Pizarro'^  and  ^'Cortez,"  Milton  H.  Smith,  president  of  the  Louis- 
ville 8c  Nashville  Railway  System,  and  Samuel  Spencer,  president  of 
the  Southern  Railway,  gave  vent  to  their  feelings  of  pride  and  joy 
in  some  very  interesting  correspondence,  to  be  found  in  the  testimony 
taken  by  the  commission  and  published  as  Senate  Document  461, 
Sixty-fourth  Congress,  first  session,  entitled  *' Louisville  &  Nashville 
Railway  Company  Hearings  Before  the  Interstate  Commerce  Com- 
mission," 1916.  This  correspondence,  exemplifying  the  illimitable 
aml)iti^ns  of  railway  financiers,  is  of  great  interest.  The  following 
extracts  from  the  testimony  of  President  Smith  and  the  letters 
referred  to  appear  on  pages  369  to  372  of  the  document. 

A  letter  from  President  Smith,  of  the  Louisville  &  Nashville  Railroad,  to  President 
Spencer,  of  the  Southern  Railway : 

[rersonal  and  confidential.] 

On  Pennsylvania  Railroad  Train  No.  21, 

February  22  y  1896. 
Samuel  Spencer,  Esq., 

President  Southern  Railway,  60  Broadway,  New  Vorl  City. 

Dear  Sir: 

Pizarro.  How  shall  we  divide  the  new  world? 

CoRTEz.  I  will  ta'  e  North  America  and  you  can  have  all  of  South  America,  except 
,  and  neither  of  us  will  do  anything  to  the  Isthmus  without  notice  to  and  cooper- 
ation of  the  other. 

Pizarro.  While  Patagonia  is  not  a  very  large  or  important  part  of  the  world,  yet, 
perhaps,  it  is  as  muc  h  as  I  can  tote. 

Refer  to  typewritten  report  of  our  interview  at  Kenesaw,  Ga.,  on  October  28,  1894, 
and  to  the  interviews  and  correspondence  that  ha\e  taken  p^ace  since  that  date,  and 
to  that  portion  of  our  interview  of  this  morning  re'atine  to  the  future  of  certain  railroads 
that  are  or  may  be  tributary  or  competitive  with  roads  controlled  by  the  L.  &  N.  R.  R. 
and  the  Southern  Ry. 

May  it  not  be  well  to  review  the  subject  and  perhaps  make  our  understandings  more 
specific? 

Your  affairs,  since  our  interview  in  October,  1894,  progressed  with  rapidity,  and 
without,  so  far  as  I  know,  encountering  serious  difficulties.  You  have  acquired  the 
G.  S.  &  v.,  the  Atlanta  &  Florida,  and  the  Central  Railroad  has  been  reorganized  in 
accordance  with  your  p^ans.  I  do  not  recall  now  what  has  been  done  with  the  Macon 
&  Northern,  nor  what  has  been  done  with  the  G.  M.  &  G.,  Macon  &  B'ham,  and  one 
or  two  other  roads,  aHhough  I  be'ieve  you  told  me  that  your  intention  was  to  allow  the 
Macon  &  B'ham  to  be  abandoned.  The  Paducah,  Tenn.  &  Alabama  and  Tenn. 
Midland  Rds.  have  been  disposed  of  as  anticipated.  The  L.  &  N.  will  not  compete 
for  the  control  of  the  M.  &  0.  Rd.  The  L.  &  N.  will  not  compete  for  the  control  of  the 
B'ham,  Sheffield  &  Tenn.  River  Rd.,  provided  you  will  acquire  it,  should  it  become 
necessary  to  do  so  to  prevent  its  extension  into  Birmingham,  or  will  not  permit  it  to 
get  into  a  position  where  it  may  become  a  disturber.  The  L.  &  N.  Rd.  will  not  com- 
pete for  the  control  of  the  Mobile  &  Birmingham  with  the  expectation  that  you  will 
acquire  it.  It  is  not  clear  what  disposition  ought  to  be  made  of  the  Georgia  &  Alabama 
Railroad. 


FEDERAL  OPEBATION  OF  TBANSPORTATION  SYSTEMS.     943 

I  hav9  advised  Mr.  Belmont  of  our  agreement  that  neither  party  will  acquire  the 
prop  rty  of  the  Marietta  &  North  Georgia  Railroad  Co.  without  the  consent  of  the 
other.   'You  may,  therefore,  freely  communicate  with  him  upon  the  subject,  and 
T  assume  he  will  do  likewise. 
Yours,  truly, 

,  President. 

Letter  from  Samuel  Spencer,  president  of  the  Southern  Railway,  to  M.  H.  Smith, 
president  of  the  Louisivlle  &  Nashville  Railroad  Co. : 

New  York,  February  29,  1896. 
Mr.  M.  H.  Smith, 

President  L.  &  N.  R.  R.,  Louisville,  Ky. 

Dear  Sir;  Your  letter  of  the  22d  instant. 

Pizarro:  Since  our  last  conversation,  the  division  of  the  New  World  between  us 
has  made  some  progress. 

Cortez:  Yes;  you  seem  to  have  acquired  Patagonia,  and  I  have  secured  a  con- 
siderable part  of  North  America  which  touched  my  former  territory,  but  it  seems 
to  me  you  have  acqnired  a  considerable  neck  of  the  Isthmus  which  is  the  connecting 
liik  between  us.  Was  it  understood  that  connecting  links  which  touched  both  oi 
of  us  should  be  a  matter  of  consultation  before  acting  or  not? 

Pizarro:  *  *  *  I  agreed  that  it  is  desirable  to  renew  the  subject  and,  if  prac- 
ticable, to  make  our  understanding  more  specific.  The  principles  on  which  I  think 
this  understanding  should  be  based  are: 

(1)  That  neither  the  L.  &  N.  nor  the  Southern,  shall  acquire  lines  in  the  territory 
of  the  other,  and  that  lines  connecting  with  or  touching  one  and  not  the  other  shall 
be  regarded  as  in  the  territory  of  the  one  which  they  connect  or  touch. 

(2)  That  neither  will  acquire  lines  allied  by  former  ownership,  lease,  or  otherwise, 
to  the  other,  and  which  at  the  moment  are  not  controlled  by  reason  of  pending  re- 
organizations or  other  cause. 

(3)  That  neither  will  acquire  lines  which  connect  with  or  touch  both,  either  directly 
or  through  subordinate  or  controlled  lines  without  previous  consultation  and,  if 
possible,  agreement. 

(4^  That  neither  will  foster  the  construction  of  new  lines  or  the  completion  of 
unfinished  ones  into  the  territory  of  the  other,  but  when  questions  with  reference 
to  such  lines  arise,  we  shall  proceed  by  agreement  with  each  other,  if  possible. 

Will  you  please  consider  this  and  say  if  such  a  declaration  of  principles  is  satisfac- 
tory? 

«  «  «  «  «  •»  'N' 

Confirming  our  verbal  understanding  of  the  22d  instant,  I  beg  to  say  that  we  will 
give  no  encouragement  to  the  construction  of  such  a  line  \vithout  previous  consulta- 
tion and  understanding  with  you,  but  if  the  present  projectors,  or  others,  devel*  p 
sufficient  strength  to  carry  the  enterprise  through  from  Nashville  to  Harriman  we 
will  cooperate  with  you  on  a  fair  basis  as  to  the  handling  of  any  business  in  con- 
nection with  it  which  is  competitive  with  you.  I  note  your  advices  to  Mr.  Belmont 
concerning  our  agreement  that  neither  party  will  acquire  the  property  of  the  Marietta 
&  North  Georgia  without  the  consent  of  the  other,  and  I  confirm  that  agreement. 
Yours,  very  truly, 

S.  Spencer,  President. 

The  Pere  Marquette  and  Cincinnati,  Uamilton  c£'  Dayton. — The 
history  of  this  railroad  system  in  its  gross  mismanagement,  mal- 
administration, and  the  peculations  of  the  great  financiers  who 
wrecked  it,  is  largely  a  counterpart  of  the  history  of  the  three  systems 
whose  rise  and  fall  from  power  have  already  been  sketched.  Time 
will  not  permit  ^oing  into  the  details  of  this  interesting  history, 
which  is  replete  with  startling  instances  of  financial  legerdemain.  It 
is  interesting  to  the  people  of  Ohio  and  Michigan,  through  which 
States  these  lines  are  chiefly  laid,  to  learn  of  the  pressure  which  was 
brought  to  bear  upon  the  legislatures  of  these  States  to  increase  the 
rates  of  charge,  on  the  excuse  that  they  were  insufficient  to  pay  legiti- 
mate revenue;  whereas  the  investigations  of  the  Interstate  Com- 
merce Commission  clearly  show  that  the  troubles  of  this  railway 


944  FEDERAL   OPERATION    OF    TRANSPORTATION    SYSTEMS. 

system  were  due  entirely  to  the  wild  speculation  and  disregard  of 
tKe  principles  of  business  ethics  which  are  practiced  by  reputable 
business  concerns. 

The  following  brief  extracts  are  taken  from  the  official  report  of 
the  Interstate  Commerce  Commission,  No.  6S33,  dated  March  13, 
1917,  entitled  ''In  re  Pere  Marquette  Railroad  Company  and  Cin- 
cinnati, Hamilton  &  Dayton  Railway  Company." 

INTRODUCTION. 

It  may  be  well  at  the  outset  to  marshal  the  outstanding  facts,  among  the  many  dis- 
closed of  record,  which  have  affected  the  abi'ity  of  these  two  carriers  to  do  their  duty 
as  common  carriers  and  also  the  value  of  their  securities  in  the  hands  of  the  investing 
p  ihiio. 

The  Pere  Marquette  came  into  being  as  a  consolidation  of  three  relatively  unsuc- 
cessful Mi  ?higan  roads  and  be:^an  operation  on  January  1,  1900.  The  consolidation 
WIS  brought  about  by  New  England  interests  heided  by  W.  W.  Crapo  and  Nathaniel 
Thavc*,  and  in  the  process  outstanding  capital  stock  in  the  hands  of  the  public  was 
inflated  by  $1,461,250  and  book  value  of  property  by  $4,290,230.41.  The  Crapo- 
Thaver  control  continued  for  three  years.  Its  operating  policies  were  sound  in  the 
main;  rolling  stock  and  miles  operated  were  increased;  a  small  surplus  was  accumu- 
lated and  used  for  im])rovements;  no  common-stock  dividends  were  paid,  and  physical 
condition  was  bettered.  Outstanding  long-term  debt  was  increased  by  almost 
$6,000,000  and  at  the  end  of  the  three  years  was  about  $31,000,000.  In  the  next  12 
years  it  was  increa?ed  by  more  than  $50,000,000  under  the  succeeding  managements. 

The  first  of  these  was'  the  Prince  management,  which  secured  control  on  December 
29,  1902,  through  purchaee  of  Pere  Marquette  common  at  a  maximum  of  $85  per  share. 
Its  policy  of  expansion  included  acquisition  of  new  equipment  costing  over  $6,000,000, 
«nd  of  about  383  miles  of  main  and  branch  lines,  most  of  which  had  a  history  of  failure. 
]n  acquiring  this  mileage  underhdng  bonds  of  over  $4,000,000  were  assumed  and 
IPmost  $3,500,000  bonds  issued.  The  Prince  interests  reversed  the  policy  of  their 
predecessors,  undermaintained  road  and  equipment,  paid  unearned  dividends  on 
common  stock,  and,  in  the  18  months  of  their  management,  added  $2,500,000  net  to 
current  liabi'ities,  also  added  over  $14,500,000  to  outstanding  long-term  debt,  pro- 
moted a  C,  H.  &  D.  syndicate,  and  through  it  sold  110,000  shares  of  Pere  Marquette 
common  to  the  C,  H.  &  D.  at  $125  per  share. 

The  next  management  was  that  of  the  C,  H.  &  D.  syndicate,  which  took  control 
o''  both  carriers  on  July  7,  1904,  and  parted  with  it  in  the  following  month  to  the 
Zi Timer man-Hollins  interests.  During  these  few  weeks  new  and  heavy  burdens  were 
bouid  upon  the  Pere  Marquette. 

■  The  Zimmerman-Hollins  management  succeeded  to  the  control  in  August,  1904, 
and  continued  the  work  begun  by  the  Prince  interests,  with  the  result  that  when  the 
coutrol  of  both  roads  was  sold  to  J.  P.  Morgan  &  Co.  on  October  20,  1905,  both  were 
promptly  put  under  the  first  receiverships  which  began  in  December,  1905. 

Meantime  another  $10,000,000  of  long  term  Pere  Marquette  securities  had  been 
marketed  through  interested  parties  at  a  cost  to  the  road  of  over  $1,100,000  in  discounts, 
$1,645,000  was  paid  to  certain  members  of  Hollins's  pool  for  their  worthless  stock  in 
the  Toledo  Railway  &  Terminal  Co.,  $400,000  was  advanced  under  syndicate  schemes 
to  affiliated  companies  and  lost,  and  over  $1,100,000  was  used  to  pay  off  floating  debts 
contracted  by  the  Prince  regime.  The  mileage  and  equipment  were  somewhat 
increased.     Operation  was  unsuccessful  and  resulted  in  deficits. 

Two  years  of  receivership  were  succeeded  in  December,  1907,  by  a  Morgan  reorgani- 
zation based  on  the  consolidation  of  the  Pere  Marquette  with  its  already  controlled 
Pere  Marquette  of  Indiana,  20  mi^es  long.  This  furnished  the  pretext  for  further 
stock  inflation,  for  an  issue  of  $5,000,000  of  6  per  cent  debentures,  and  for  the  writing 
up  as  "  cost  of  road  and  equipment"  of  the  direct  losses,  aggregating  almost  $5,000,000, 
of  the  former  administrations.  Morgan  control  has  continued  since,  except  for  the 
second  receivership,  which  began  on  April  5,  1912.  In  the  intervening  yeais  the  Pere 
Marquette  was  in  constant  difiicuHy,  revenues  failed  to  provide  for  expenses  and 
charges,  and  bond  interest  was  paid  only  at  the  cost  of  adequate  maintenance  of  the 
property.  Road  and  equipment  deteriorated  markedly,  financing  became  more  and 
more  difficult,  and  needed  funds  were  secured  only  at  the  expense  of  heavy  discounts. 
The  second  receivership  was  necessary  to  accomplish  what  the  first  had  failed  to 
accomplish — the  physical  and  financial  rehabilitation  of  the  Pere  Marquette. 

The  road  is  now  emerging  from  the  second  receivership.  During  five  years  of  court 
control  it  has  greatly  improved  in  physical  condition,  and  its  service  has  improved 


FEDERAL  OPERATION  OF  TRANSPORTATION  SYSTEMS.     945 

accordingly.  Under  the  reorganization  plan  a  large  part  of  the  fixed  interest-bearing 
obligations  outstanding  on  June  30,  191G,  are  to  be  exchanged  for  capital  stock,  of 
which  there  is  to  be  $11,200,000  of  5  per  cent  prior  preference,  cumulative,  $12,429,000 
of  5  per  cent  preferred,  cumulative,  and  $45,046,000  of  common  shares.  The  plan 
contemplates  a  decrease  of  over  $8,000,000  in  capitalization,  exclusive  of  overdue 
interest  on  funded  debt  amounting  to  approximately  $10,000,000,  and  a  considerable 
decrease  in  fixed  interest  charges.  The  new  capitalization  will  a^so  represent  $16,- 
000,000  of  new  money  provided  for  reorganization  expenses,  additions  and  better- 
ments, working  capital,  and  other  purposes. 

In  contrast  to  the  Pere  Marquette  the  C,  H.  &  D.,  prior  to  July  7,  1904,  when  the 
C,  H.  &  D.  syndicate  took  control,  was  a  highly  prosperous  road,  despite  losses  of 
several  millions  through  Henry  S.  Ives  and  his  associates  in  the  late  eighties,  the 
drain  of  supporting  less  prosperous  lines  west  of  Hamilton,  Ohio,  a  funding  of  deficits 
and  interest  on  the  western  lines  into  some  $1,800,000  of  bonds,  and  the  injection  in 
1895  of  $10,200,000  of  water  into  the  capital  stock  through  the  consolidation  effected 
by  the  Shoemaker-Woodford  interests,  then  in  control.  These  interests  sold  out  to 
the  C,  H.  &  D.  syndicate  in  1904,  receiving  $125  per  share  for  their  common  stock, 
which  was  water,  and  $110  per  share  for  10,000  shares  of  preferred  stock.  The  surplus 
of  that  date  was  replaced  in  the  following  year  bv  a  deficit  of  at  least  $1,086,127.49, 
allowance  being  made  for  some  $843,000  concealed  by  falsification  of  accounts. 

*  *  *  *  ■it  *  * 

More/an  control,  from  1905. — The  next  important  changes  came  when  the  control 
of  the  0.,  H.  &  D.,  and  incidentally  of  the  Pere  Marquette,  passed  to  the  Erie  Railroad 
Co.  Representatives  of  the  Erie  took  charge  of  the  Pere  Marquette  management  on 
October  20,  1905.  Shortlv  thereafter  upon  the  rescission  of  the  Erie's  purchase  of 
the  C,  H.  &  D.  from  J.  P.  Morgan  &  Co.,  George  W.  Perkins,  of  the  latter  firm,  on 
December  4,  1905,  went  on  the  Pere  Marquette  board  and  the  Erie  representatives 
remained.  It  appears  that  Perkins  more  than  anyone  else  guided  the  Pere  Mar- 
quette through  the  reorganization  following  the  receivership  of  December  4,  1905. 

In  discussing  the  matter  of  stock  control  after  the  first  receivership  consideration 
must  be  given  to  the  reorganization  which  followed.  This  "reorganization"  of 
December  11,  1907,  was  on  paper  only.  The  thing  accomplished  was  release  of  the 
Pere  Marquette  from  receivership  without  either  foreclosure  or  a  downward  adjust- 
ment of  capital  liabilities.  The  means  used  as  a  pretext  was  merely  the  consolidation 
of  the  Pere  Marquette  of  Michigan  with  its  subsidiary,  the  Pere  Marquette  Railroad 
Co.  of  Indiana.  This  subsidiary  will  be  furtl  er  considered,  but  note  may  be  taken 
here  that  it  was  only  20  miles  long;  that  its  capital  stock  of  $500,000  was  owned  by  the 

Earent  company;  that  its  bonds  bore  the  guaranty  of  that  company;  and  that  it  had 
een  constructed,  in  effect,  by  the  parent  company  to  piece  out  the  latter's  line  toward 
Chicago.  In  this  consolidation  the  name  "'Pere  Marquette  Railroad  Company" 
was  retained;  capital  stock,  including  first  and  second  preferred  as  well  as  common, 
was  provided  for  to  the  amount  of  $28,500,000,  equaling  the  authorized  issues  of  the 
two  constituents;  their  funded  debt  and  other  obligations  were  assumed;  and  last, 
but  of  great  importance,  $5,000,000  of  6  per  cent  five-year  debenture  bonds  were 
authorized  to  take  up  current  indebtedness,  including  receiver's  certificates,  and  \\  ere 
offered  to  the  stockholders. 

The  first  board  of  the  reorganized  company,  elected  August  12,  1907,  was  a  Morgan 
board.  No  changes  of  consequence  occurred  in  its  make-up  until  November  5,  1909, 
when  certain  representatives  of  the  Baltimore  &  Ohio  Railroad  Company  were  elected, 
following  the  latter  road's  entrance  into  C,  H.  &  D.  affairs.  But  even  then  the 
Morgan  interest  was  the  dominant  one  in  the  Pere  Marquette  board.  Early  in  1911, 
when  the  C,  H.  &  D.'s  110,000  shares  were  finally  sold  to  J.  P.  Morgan  &  Co.,  the 
Baltimore  &  Oliio  directors  resigned. 

A  little  more  than  a  year  later,  on  April  5,  1912,  the  road  again  went  into  the  hands 
of  receivers.  On  March  9,  1914,  there  was  another  extensive  change,  with  more 
residents  of  Michigan  on  the  board. 

******* 

Passing  now  to  a  consideration  of  the  roads  "affiliated,"  it  appears  that  for  the 
Huron  &  Western,  which  ran  west  from  Bay  City  principally  to  serve  a  coal  mine, 
the  Pere  Marquette  paid  $106,559.29  to  the  Grand  Trunk  Railway  system,  which 
seemingly  had  built  it  at  that  cost.  At  the  same  time  the  stock  came  into  the  posess- 
eion  of  the  Pere  Marquette,  and  since  1903  the  road  has  been  operated  as  a  part  thereof. 
At  the  price  paid  this  property  cost  about  $9,340  per  mile. 

No  accounts  of  the  Grand  Rapids,  Kalkaska  &  Southeastern  can  be  found.  This 
line  ran  from  Rapid  City,  Mich.,  in  a  generally  southeastern  direction,  to  Stratford, 
Mich.  It  was  built  to  connect  a  timber  tract  of  the  Thayer  Lumber  (  o.,  located  in 
Missaukee  County,  with  the  Chicago  &  West  Michigan.    This  latter  road,  by  contract, 

41215—18 3 


946  FEDERAL   OPERATION   OF   TRANSPORTATION   SYSTEMS 

agreed  to  oversee  the  construction,  furnish  the  necessary  rolling  stock,  and  lease  and 
operate  the  road  for  10  years  following  its  completion,  paying  as  rental  $20,000  per 
annum  plus  15  per  cent  of  gross  receipts  except  upon  pine. 

Its  minute  books  show  that  the  Kalkaska  road  was  to  be  constructed  by  William 
Alden  Smith,  under  a  contract  dated  October  21,  1897,  by  which  the  constructor  was 
to  receive  as  payment  $200,000  in  bonds  and  $284,000  in  stock,  less  such  as  had  been 
Subscribed  by  him.  According  to  the  State  railroad  commissioner's  reports  the 
entire  sum  of  $484,000  was  treated  by  that  carrier  as  cost  of  road  and  equipment. 

In  1903,  a  few  years  prior  to  the  expiration  date  of  the  lease,  the  Pere  Marquette, 
through  a  contract  with  George  A,  Fernald  and  others,  purchased  the  entire  capital 
stock  of  the  Kalkaska  road  for  $107,000,  payable  in  Pere  Marquette  consolidated  4 
per  cent  bonds,  and  assumed  its  $142,000  of  first  mortgage  5  per  cent  bonds  then  re- 
maining outstanding.  The  result  was  a  standing  minimum  hxed  charge  against  the 
Pere  Marquette  of  $11,380  annually  for  what  was  originally  a  tap  line  and  undoubtedly 
diminishing  in  value  as  the  timber  was  being  cut  out.  Speaking  of  this  branch  in 
May,  1915,  the  chief  operating  officer  of  the  Pere  Marquette  said: 

"It  is  bad.  There  are  14  miles  of  the  track  from  Eastman  Junction  to  the  end  at 
Stratford  that  is  so  bad  that  we  operate  it  under  caution,  and  I  am  about  to  ask  the 
railroad  commission  for  the  authority  to  take  it  up.  There  is  no  business  on  the  branch, 
to  warrant  our  continuing  in  operation,  and  we  are  now  going  up  there  twice  a  week 
to  bring  out  what  little  business  there  is. " 

*  *  *  «  *  *  .  * 

Morgan's  purchase  was  on  behalf  of  the  Erie  Railroad  Co.  The  incidents  of  that 
purchase,  its  speedy  rescission  by  the  Erie,  and  the  assumption  by  Morgan  of  the 
obligation,  are  later  set  forth.  Immediately  after  the  control  had  been  returned  to 
Morgan  a  receivership  was  asked,  and  it  began  December  4,  1905. 

******* 

vni.    MORGAN   MANAGEMENT,    PROM    1905. 

It  seems  proper  to  treat  these  years  as  one  period  in  the  history  of  the  Pere  Marquette. 
During  this  period  there  were  extensive  changes  in  the  stock  ownership,  particu- 
larly in  the  transfer  of  the  C,  H.  &  D.  holdings  of  110,000  shares  of  Pere  Marquette 
common  to  J.  P.  Morgan  &  Co.,  and  there  were  changes  in  the  Pere  Marquette  direc- 
torate as  a  result  of  the  purchase  of  control  of  the  C,  H.  &  D.  first  by  the  Erie  and 
then  by  the  Baltimore  &  Ohio,  while  the  C,  H.  &  D.  still  held  that  common.  But 
from  December  4,  1905,  when  George  W.  Perkins  went  on  the  Pere  Marquette  board, 
representing  Morgan  &  Co.,  that  firm  seems  at  all  times  to  have  been  the  guiding 
hand  in  Pere  Marquette  affairs. 

The  first  event  of  importance,  following  the  acquisition  of  C,  H.  &  D.  control  by 
the  Erie  on  October  20,  1905,  and  the  reorganization  in  its  interest  of  the  Pere  Mar- 
quette board,  was  the  receivership  under  Judson  Harmon,  commencing  December  4, 
1905.  This  was  coincident  with  the  receivership  of  the  C,  H.  &  D.,  and  on  behalf 
of  Morgan  &  Co.  it  is  insisted  that  the  step  was  necessary  in  order  to  separate  the  two 
corporations.  However  that  may  be,  it  is  apparent  that  the  Pere  Marquette  of  itself 
was  then  well  on  the  way  toward  a  receivership.  It  continued  under  a  receiver 
until  December  14,  1907. 

Thelosses  to  the  stocTclioldersunder  Morgan  control  exceed$22fi00, 000. ~ 
The  following  is  from  page  59  of  the  commission's  report: 

Through  this  Morgan  reorganization  the  Pere  Marquette  emerged  from  receivership 
in  1907  carrying  a  load  of  outstanding  capital  stock  and  funded  debt  heavier  by 
$7,000,000  than  that  under  which  it  was  staggering  when  the  receivership  began  two 
years  before.  It  never  succeeded  in  carrying  itself  thereafter.  A  proper  reorganiza- 
tion would  have  included  reduction  and  not  increase  of  fixed  charges.  The  plan  of 
reorganization  dated  October  30,  1916,  carries  marked  decrease  in  fixed  charges. 

Other  losses  carried  through  the  profit  and  loss  account  in  addition  to  the  results  of  oper- 
ation must  be  considered.    In  the  aggregate  the  showing  to  June  30, 1914,  was  as  follows: 

Debits: 

Net  loss  from  income ^12, 962,  905.  48 

Debt  discount  extinguished 10,  500,  486.  02 

Net  loss  on  retired  road  and  equipment 3, 054,  800.  59 

Miscellaneous  debits "24, 047. 40 

Total  debits 27,242,239.49 

Credits:  Miscellaneous  credits 5>  1^7, 199.  76 

Profit  and  loss  balance  (deficit) 22,055,039.73 


FEDERAL   OPEKATION    OF    TRANSPORTATION    SYSTEMS.  947 

Falsification  of  accounts. — Under  the  above  heading  the  commission 
reports  in  detail  certain  accounts  which  proved  to  be  false,  respecting 
which  they  make  the  following  remarks : 

12.  Falsification  of  accounts  during  Zimmennan- Rollins  control. — The  following 
etatement  presents  a  condensed  income  account  covering  the  year  ended  June  30, 
1905,  for  the  C,  H.  &  D.,  including  its  proprietary  line,  the  Cincinnati,  Indianapolis 
&  Western,  1,038.24  miles  operated,  as  recorded  in  the  carrier's  books  of  account: 

Gross  earnings  from  operation $6, 008, 917. 65 

Operating  expenses 8, 095,  885. 11 

Income  from  operation $1, 913, 032. 54 

Taxes 316, 061. 12 

Net  income  from  operation 1,  596,  971. 42 

Income  from  other  sources 59, 688. 65 

Gross  income.' 1,  656, 660. 07 

Deductions  from  gross  income: 

Rents  paid  for  lease  of  road $517,  288. 35 

Miscellaneous  rents 372, 273. 11 

Interest  accrued  on  funded  debt 1, 009, 515. 63 

Other  deductions 348. 52 

Total  deduction  from  income 1, 899, 425. 61 

Net  deficit 242, 765. 54 

The  4  per  cent  preferred  stock  bore  guaranteed  dividends,  which  makes  the  accrual 
of  the  dividend  more  in  the  nature  of  a  fixed  charge  than  a  division  of  profits.  If 
these  dividends  are  so  considered,  the  net  deficit  for  the  year  was  $251,969.20. 

The  foregoing  income  account  bore  little  resemblance  to  the  truth.  The  fact  is 
that  large  sums  properly  chargeable  to  the  income  for  1905  were  ordered  to  be  charged 
to  various  other  accounts  and  were  so  charged  in  a  way  to  conceal  the  true  state  of 
the  company's  affairs.  These  entries  violated  commonly  accepted  accounting  prin- 
ciples in  such  a  flagrant  manner  as  to  make  it  evident  that  the  purpose  was  to  delib- 
erately falsify  the  accounts  in  an  effort  to  avoid  showing  the  utter  failure  of  the  com- 
pany to  earn  anywhere  near  its  fixed  charges. 

The  charges  against  the  income  of  that  year  thus  willfully  omitted  included  inter- 
est on  loans  made  to  retire  preferred  stocks;  interest 

But  what  the  Zimmerman-Hollins  management  accomplished  along  that  line  was 
little  compared  with  what  it  attempted. 

On  pages  161-162  are  the  following,  showing  how  false  and  ''fake" 
telegrams  were  used: 

Further,  in  connection  with  this  financial  statement,  on  which  such  great  reliance 
was  placed,  we  must  refer  to  an  exchange  of  correspondence  which  occurred  between 
August  15  and  24,  1905,  concerning  a  certain  statement  then  being  prepared  at  the 
direction  of  the  Hollins  firm  by  President  Zimmerman,  and  one  copy  of  which  eventu- 
ally went  to  that  firm  and  another  to  George  W.  Young.  This  statement  is  described 
in  the  correspondence  as  one  showing  "capitalization,  fixed  charges,  estimated  earn- 
ings, etc.,  of  the  C,  H.  &  D.  and  P.  M.,"  the  figures  for  the  Chicago,  Cincinnati  & 
Louisville  to  be  omitted,  and  this  description  fits  well  the  document  placed  in  this 
record  on  behalf  of  J.  P.  Morgan  &  Co.  It  was  prepared  in  and  forwarded  from  Cin- 
cinnati by  N.  B.  Hersloff,  an  employee  of  Hollins  &  Co.,  but  evidently  did  not  show 
as  favorable  results  as  were  desired,  for  on  August  24  the  firm  wired  Zimmerman  as 
follows : 

"Better  not  have  Young  show  statement  you  sent  him;  estimate  earnings  too  poor; 
telegraph  him  in  two  separate  telegrams,  one  not  use  statement  sent  him,  as  you  have 
aiiother  corrected  one,  and  another  telegram  saying  have  not  mailed  statement  because 
will  bring  on  figures  with  me  early  next  week." 

One  of  the  starthng  disclosures  in  this  investigation  is  the  ease 
and  informaUty  with  which  one  man,  in  a  leisure  hour  at  his  home, 
can,  on  a  sheet  of  note  paper,  either  buy  or  sell  a  great  railroad,  as 
happened  in  the  case  of  the  Pere  Marquette.     Mter  referring  to 


948     FEDERAL  OPERATION  OF  TRANSPORTATION  SYSTEMS. 

instances  of  the  maladministration  of  this  system,  showing  losses 
of  the  stockholders  of  about  $16,000,000,  the  following  story  of  the 
sale  of  this  system  is  found  in  the  report  of  the  Interstate  Commerce 
Commission,  on  page  166: 

What  had  happened  in  the  24  hours  meanwhile  was  that  J.  P.  Morgan  and  H.  B. 
Hollins  had  met  at  the  former's  New  York  residence  on  September  9,  1905,  and 
closed  an  agreement  for  the  purchase  by  Morgan  of  Hollins's  C,  H.  &  D.  stock  hold- 
ings, involving  an  expenditure  of  some  $12,000,000.  Francis  Lynde  Stetson  was 
present  as  Morgan's  counsel  and  wrote  the  agreement  on  a  sheet  of  note  paper.  Its 
text  follows  and  its  significance  will  be  further  considered: 

9  Sept.  1905. 

219  Madison  Avenue. 

H.  B.  Hollins  &  Co.  will  sell  and  J.  P.  Morgan  &  Co,  will  purchase  56,000  shares 
of  C.  H.  &  D.  R.  R.  Co.  Common  Stock  at  the  price  of  160%  with  interest  at  the  rate 
of  4|%  per  annum  from  December  7th,  1905,  until  date  of  delivery,  all  dividends 
to  be  credited  against  the  interest  and  to  J.  P.  Morgan  &  Co. 

This  delivery  may  be  made  by  H.  B.  Hollins  &  Co.  at  any  time,  and  must  be  made 
by  them  upon  October  1st,  1906,  or  at  such  time  thereafter  as  shall  be  specified  by 
J.  P.  Morgan  &  Co.  by  three  months'  notice  in  writing. 

If  so  requested  by  H.  B.  Hollins  &  Co.,  J.  P.  Morgan  &  Co.  will  lend  to  them  upon 
their  obligations  secured  by  C.  H.  &  D.  stock  or  syndicate  subscriptions  at  135% 
such  sums  as  they  may  find  necessary  to  carry  such  stock  or  subscriptions,  to  an 
aggregate  amount  not  exceeding  56,000  shares,  the  rate  of  interest  to  be  4^%. 

This  contract  and  all  obligations  of  J.  P.  Morgan  &  Co.  may  be  terminated  by  them 
at  any  time  after  October  1,  1906x,  by  three  months'  notice  in  writing  by  J.  P. 
Morgan  &  Co. 

J.  P.  Morgan  &  Co. 
H.  B.  Hollins  &  Co. 

X1906 
H.B.H. 
J.P.M. 

*In  addition  we  gave  H.  B.  H.  &  Co.  order  to  buy  about  16,000  sh.  participation 
ctfs.  at  about  135. 

*  *  *  *  *  «  * 

In  working  up  this  new  syndicate  it  seems  that  all  concerned  were  informed  as  to 
the  true  financial  condition  of  the  properties,  so  that  it  would  appear  to  have  been  a 
difficult  matter  to  induce  subscribers  to  embark  in  the  new  venture.  Even  though 
certain  of  the  obligations  were  recapitalized  so  as  to  reduce  the  fixed  charges  to  the 
level  of  the  earnings,  as  seems  to  have  been  proposed,  the  proi)osition  would  still  seem 
to  have  been  too  uncertain  to  attract  such  substantial  subscriptions  as  were  needed. 
It  may  well  be  that  the  following  sentence  from  Erb's  letter  of  September  20,  1905, 
addressed  to  one  of  the  original  subscribing  interests  of  May  19,  1904,  suggests  one,  if 
not  the  underlying,  purpose  of  this  syndicate: 

"Messrs.  Edwin  Hawley  and  John  W.  Gates  were  unim-portant  participants  in 
this  syndicate  and  their  names  were  made  use  of,  with  J.  Pierpont  Morgan  &  Co., 
to  create  the  impression  that  the  property  would  go  into  speculative  hands,  and  they 
have  since  stepped  forward  to  take  the  property  from  Messrs.  H.  B.  Hollins  &  Co., 
thus  relieving  the  entire  situation  and  to  the  satisfaction  of  everybody  in  interest." 

Whatever  motive  lay  beneath  the  new  syndicate  scheme,  there  is  no  doubt  as  to 
the  effect  it  had  on  the  Erie  management. 

Mr.  Harriman  is  introduced  in  the  transaction  and  the  president  oj  the 
Erie  Railroad  is  snubbed  by  Mr.  Morgan. — The  following  is  from  pages 
172-173  of  the  report: 

President  Underwood's  reference  to  Harriman 's  whereabouts  prior  to  their  interview 
arose  from  a  question  as  to  the  accuracy  of  a  report  that  the  Erie's  purch<ise  of  the 
C,  H.  &  D.  had  transpired  during  Harriman 's  absence  from  the  country.  This  record 
does  not  settle  this  point  definitely,  but  it  does  show  that  Harriman  did  not  attend 
any  meeting  of  the  board  or  executive  committee  during  the  period  July  26  to  Novem- 
ber 1,  1905.    The  record  also  clearly  Indicates  Harriman 's  emphatic  disapproval  of 


FEDERAI-  OPERATION  OP  TRANSPORTATION   SYSTEMS.  949 

the  purchase  upon  his  return  in  November,  with  the  result  that  President  Underwood 
obtained  another  interview  with  Morgan,  as  to  which  he  testified  as  follows: 

"Then  I  went  down  and  had  an  audience  with  Mr.  Morgan,  and  I  told  him  that 
practically  the  C,  H.  &  D.  had  a  floating  debt  that  was  not  visible  and  in  the  statement 
he  showed  me.  He  said:  'Well,  we  will  look  at  the  statement,'  and  there  was  some 
attempt  made  to  find  that  statement,  but  it  was  unsuccessful;  it  was  not  produced. 
I  had  not  kept  it  because— well,  I  did  not  keep  it.  I  said:  'Mr.  Morgan,  the  state- 
ment that  I  made  to  you  of  the  effect  that  the  acquisition  of  the  C,  H.  &  D.  on  the 
Erie's  finances  is  null  and  void,  because  the  statement  was  inaccurate.'  He  looked 
at  me  and  said:  'Well,  sir,  if  the  statement  that  we  made  to  you  was  inaccurate,  and 
for  any  reason  you  think  that  the  Erie  Railroad  has  made  a  bad  trade,  your  duty  is 
very  simple — you  have  only  to  convene  your  board  of  directors  and  rescind  it,  and  I 
advise  you  to  do  it  at  once.' 

"I  bade  him  good  afternoon  and  walked  out  of  his  office,  and  as  I  came  out  of  his 
oflSce  I  met  Mr.  Stetson,  and  I  told  him,  being  counsel,  'Mr.  Morgan  has  just  authorized 
the  rescinding  of  that  trade,  and  I  think  it  was  a  very  unusual  and  extraordinary 
thing  for  him  to  do.  I  am  surprised  that  he  would  do  it.  And  I  wonder  if  it  would  be 
bad  taste  for  me  to  tell  him  that. '  He  said:  'He  might  like  to  hear  it.'  So  I  went  back, 
and  Mr.  Morgan  was  standing  with  a  paper  in  his  hand,  and  I  said,  *I  would  like  to 
speak  to  you  for  a  minute?'  He  made  no  answer.  I  said  again,  'I  would  like  to  speak 
to  you  for  a  minute.'  I  said,  'I  want  to  tell  you  I  think  you  have  done  a  very  big 
thing,  the  biggest  thing  I  ever  came  in  contact  with.'  He  said  nothing.  I  said, 
'Did  you  hear  me?'    He  said  'I  did,  sir.'    And  I  walked  out." 

In  closing  the  report  the  Interstate  Commerce  Commission  says  as 
follows : 

Nothing  disclosed  in  the  record  before  us  is  to  be  more  regretted  than  the  readiness 
of  great  banking  institutions  in  our  financial  centers  to  loan  enormous  sums  of  money 
upon  exceedingly  precarious  security  in  aid  of  such  schemes  as  have  been  devised  in 
the  wrecking  of  these  railroads.  Not  only  this,  but  the  high  officers  of  such  institu- 
tions, while  acting  ostensibly  as  directors  of  the  railroads,  have  in  fact  been  little 
more  than  tools  and  dummies  for  the  promoters.  The  trustees  of  other  people's 
money  seem  to  have  had  little  compunction  about  violations  of  their  trusts  for  the 
benefit  of  the  promoters,  and  at  their  demand. 

Can  the  like  of  what  has  befallen  these  two  road^s  be  made  impossible  hereafter? 
Perhaps  not  entirely,  so  long  as  financial  circles  continue  complaisant  toward  financial 
exploitafions  which  prove  succe^ful.  But  it  will  help  if  minority  stockholders  are 
more  watchful  of  their  interests  and  if  bondholders  assert  their  rights  before  their 
security  fades  away  for  lack  of  upkeep,  purposely  neglected  in  order  to  pay  interest 
and  dividends  unearned.  It  would,  in  our  opinion,  render  such  exploitation  more 
difficult  if  the  issuance  and  marketing  of  all  securities  of  common  carriers  were  sub- 
ject to  Federal  regulation.  As  to  that  we  renew  the  recommendations  repeatedly 
made  to  the  Congress  in  our  annual  reports.  We  also  point  to  the  lesson,  here  again 
taught,  that  access  to  correspondence  files  is  indispensable  for  a  thorough  and  accu- 
rate understanding  of  the  motives  and  purposes  which  underlie  the  formal  entries 
made  in  accounts  and  records. 

Unwise  management  contributed  to  the  downfall  of  these  roads,  but  breach  of  trust 
by  corporate  officials,  often  for  personal  gain,  was  the  main  cause  here,  as  in  the  records 
developed  in  other  investigations.  Consolidations  and  Combinations  of  Carriers,  12 
I.  C.  C,  277;  The  New  England  Investigation,  27  I.  C.  C,  560;  St.  Louis  &  San 
Francisco  Railroad  Investigation,  29  I.  C.  C,  139;  Financial  Investigation  of  N.  Y., 
N.  H.  &  H.  R.  R.  Co.,  31 1.  C.  C,  32;  Financial  Transactions  C,  R.  I.  &  P.  Ry.Co., 
36  I.  C.  C,  43.  That  downfall,  with  its  deplorable  consequences,  can  be  traced  only 
to  betrayal  within,  and  not  to  compulsion  from  without.  Neither  rivalry,  nor  rate 
level,  nor  regulation,  nor  all  combined,  can  be  found  on  this  record  to  have  contrib- 
uted in  any  appreciable  degree  to  the  disaster. 

In  discussion  of  transportation  conditions  during  the  last  two  years  or  more  much 
has  been  made  of  the  fact  that  over  40,000  miles  of  our  railroads  were  under  receiver- 
ship. A  recent  publication  lists  69  railroads,  among  them  the  Pere  Marquette  and 
C,  H.  &  D.,  as  m  the  hands  of  receivers  on  December  31,  1916.  Their  combined 
operations  cover  34,559  miles.  Over  40  per  cent  of  that  mileage  is  in  systems  which, 
as  shown  by  our  investigations,  have  suffered  principally  from  financial  mismanage- 
ment and  exploitation.  Over  40  per  cent  more,  of  which  a  large  part  is  located  in 
Texas,  is  comprised  in  two  southwestern  systems.  The  remaining  5,800  miles  are 
distributed  among  fifty-odd  carriers  in  different  parts  of  the  country. 


950  FEDERAL   OPERATION    OF    TRANSPORTATION   SYSTEMS. 

The  statements  of  fact  herewith  presented  having  all  been  verified 
from  the  official  records  and  sworn  testimony  taken  before  the  Inter- 
state Commerce  Commission,  disclose  a  condition  of  profligacy,  waste, 
falsifymg  and  destruction  of  records,  and  the  ignoring  and  violation 
of  law,  both  State  and  National,  so  vast  in  its  conception  and  so 
successfully  carried  out  in  defrauding  the  American  people  as  to  be 
beyond  belief. 

Can  it  be  possible  that  the  American  people,  after  learning  how  our 
great  governmental  functions  liave  been  usurped  by  the  few,  who  have 
been  given  such  vast  and  dangerous  powers  by  special  privilege,  will 
permit  this  '' invisible  government"  to  destroy  democracy  and  the 
public  welfare  in  our  Republic  as  here  disclosed  ?  The  record  is  before 
you  and  the  only  remedy  lies  in  the  ownership  by  the  people  and  the 
operation  through  the  agencies  of  their  Governemnt  of  all  those 
utiHties  and  natural  resources  which  by  right  belong  to  the  people, 
and  upon  the  just  and  democratic  administration  of  which  the  public 
welfare  and  happiness  depend. 


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